I’m feeling pessimistic about the pandemic today, so be warned, that may colour my views on the Rolls-Royce (LSE: RR) share price. I wouldn’t buy it today, because I think the path out of the pandemic could be longer and bumpier than we would like to believe.
Wasn’t the Covid crisis supposed to be over by last summer? Last Christmas? This Easter? Hope springs eternal but I’m not going to let it to cloud my judgement as an investor. The recovery is for the long haul, and the Rolls-Royce share price performance is likely to reflect that.
Others seem to be coming to the same decision. The stock is plunging 5% today, on news that President Biden’s administration is introducing new restrictions on flights. This is a global trend, of course. Australia is shut for a year. The UK is also locking down. Mutant Covid is the culprit.
The world isn’t flying today
Rolls-Royce is the type of stock I might buy when I expect the world to fly out of lockdown and start travelling again. Right now, that happy day seems as far away as ever.
Last year, a lot of investors took advantage of the falling Rolls-Royce share price after the stock market crash in March. The FTSE 100 engineering company has been thumped by the collapse in global travel, for two reasons. First, it specialises in manufacturing aircraft engines, and demand slumped as airlines were forced to ground their fleets.
An even bigger problem is that it generates most of its revenues from the engine service packages it sells alongside its engines. These are based on miles flown, so when nobody is flying, demand for maintenance collapses too.
Last year, Rolls-Royce bolstered its balance sheet (and share price) with a fully-underwritten £2bn rights issue, plus a new £3bn debt package. It also slashed jobs, unveiled £750m of cost savings and £2bn of disposals. This triggered a wave of optimism among investors, and the share price doubled in short order as people piled in.
I missed that rally, sadly, and decided the Rolls-Royce share price recovery was overdone. Today, its stock trades at 19 times earnings. That looks pricey to me, given headwinds. Especially for a company with net debt of around £3.5bn, against a market cap of £8.2bn.
The Rolls Royce share price will remain bumpy
I’m certainly not forecasting disaster for Rolls Royce. Analysts reckon the rescue package could see it through until 2022, when hopefully civil aviation will be soaring again. With luck, Rolls-Royce will have a new chairman in place by then too.
If I was holding this stock, I wouldn’t sell it. Even in my glum mood, I believe the world will find a way out of its malaise and the Rolls-Royce share price could lead the market recovery when it happens. I’m just not rushing to buy right now.
I feel the time to invest in stricken companies like Rolls-Royce is when the share price is down and the pessimists are out in force. If I leave it too late, I will have missed a great opportunity to buy this company at a reduced price.
That’s a chance I’m willing to take, given my downbeat mood.
