The Motley Fool

Rolls-Royce and Cineworld: 2 casualties of the Covid-19 market crash. Here’s what I think

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Tired or stressed businessman sitting on the walkway in panic digital stock market crash financial background
Image source: Getty Images

Rolls-Royce (LSE:RR) and Cineworld have both seen their share prices plunge over 80% in a year. Many British companies are struggling, but these two could be among the hardest hit. While some stocks have fully recovered from the lows of the Covid-19-induced market crash, others have fallen further. Two of these are Rolls-Royce and Cineworld.

Debt and dilution

Prior to Covid-19, Rolls-Royce looked to have a perfect business model. It sold its aircraft engines at a loss, to benefit from a recurring income based on air miles flown. With a booming aviation industry, this was a great way to bring in a steady income stream. But the unforeseen global shutdown in flights put paid to this with devastating effect. It no longer has this recurring income that it relies on to keep its expensive business running.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

Rolls-Royce jet engine

Rolls-Royce jet engine – Source: Rolls-Royce

The Rolls-Royce share price is down 81% year-to-date and earnings per share are negative. There have been rumours of an impending rights issue for weeks and today it announced its plans to go ahead. It intends to raise £2bn through this fully underwritten 10 for 3 rights issue. This gives existing shareholders access to shares at 32p each, a 41% discount to the closing price of £1.30 per share yesterday. If successful, it will have access to a new two-year £1bn loan facility too.

The company will also attempt to raise an additional £1bn through debt issuance in the bond market soon. And it’s received an indication of support in principle from the government department UK Export Finance to extend its 80% guarantee to support a potential £1bn increase in the company’s existing five-year £2bn loan.

The FTSE 100 constituent hopes the rights issue will be enough to improve liquidity and reduce leverage on its balance sheet. It’s subject to shareholder approval at its AGM on October 27. Management has already cut 9,000 jobs and I think it’s doing all it can to survive the pandemic. Whether it can make a full recovery will very much depend on how quickly flight travel returns to 2019 levels.

Cineworld’s dwindling revenue

FTSE 250 firm Cineworld is another company suffering at the hands of Covid-19, but its problems started before that. It began acquiring cinema chains to propel it to become the biggest cinema group in the world. This may have been successful had Coronavirus not come along and scuppered its plans. It now has a mountain of debt and very little revenue coming in.

Some 73% of its revenue usually comes from the US and considering the Covid-19 situation there, that’s not reassuring. Lockdowns continue and the upcoming election is causing political unrest. I don’t think this bodes well for cinema attendance to return to normal soon.

Is now a good time to invest?

Billionaire investor Warren Buffett once said that “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

I agree, as long as the company is truly wonderful and likely to stand the test of time. I think Rolls-Royce could do this, considering its history, its importance to Britain and its involvement in artificial intelligence. However I’m not so sure about Cineworld. I think both the Rolls-Royce and Cineworld share prices will remain volatile until a vaccine is in circulation. Without a dividend, they look a risky buy.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.