Should I invest in Rolls-Royce shares now?

Can Rolls-Royce shares still deliver a decent investment return for shareholders buying today as the business recovers from the pandemic?

| More on:

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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

Rolls Royce (LSE: RR) is one of those companies suffering the most through the pandemic. In 2019 before the Covid crisis, more than 50% of the firm’s underlying revenue came from the civil aerospace market. So the grounding of most of the world’s aircraft for long periods severely damaged the trading figures.

Should I buy some Rolls-Royce shares now?

But although the civil aerospace division produced the most revenue, it only delivered around 5% of the company’s underlying operating profit that year. And, overall, Rolls-Royce wasn’t in particularly good shape leading up to the pandemic. In 2019, the company produced an overall loss of just over 69p per share. And it was already battling to restructure the business.

Last autumn’s £5bn refinancing package removed some of the immediate worries caused by the Covid crisis. And the directors have stepped up restructuring efforts aimed at right-sizing operations for the future.

The sector may look different for some considerable time as the world emerges from the worst effects of the pandemic. I think the most likely outcome for Rolls-Royce is a shrinking turnover that could remain diminished for years.

But the immediate fire-fighting appears to have subsided. And the company is beginning to look to the future again. In a trading update at the end of January, the directors said its restructuring strategy is driving down costs. But they think there’ll be a free cash outflow from the business in 2021 of around £2bn. And that will be hard on the heels of a free cash outflow of around £4.2bn in 2020. Right now, Rolls-Royce is losing money — a lot of it.

The stakes are high. The company has already moved from having a net cash position worth millions in 2019 to a net debt position worth somewhere between £1.5bn and £2bn now. However, the directors reckon the company has around £9bn of liquidity available to see the business through the rest of the pandemic. Part of that is a target to raise around £2bn from disposal proceeds.

Recovery ahead, but will the business thrive?

The top managers are “confident” the company is “well-positioned” for the future. And they think there will likely be a free cash inflow of around £750m “as early as” 2022. To put that in perspective, the company delivered free cash flow of £873m in 2019, up from £568m in £2018.

But that positive cash flow outcome depends on a recovery in engine flying hours, which itself depends on vaccines beating back the pandemic. Positive cash flow also relies on the ongoing execution of the restructuring and cost-saving programme. I’m also mindful that the £873m free cash inflow in 2019 didn’t prevent Rolls Royce from posting a bottom-line loss.

It looks like the business is set to recover somewhat. But the extent of the eventual recovery is unknown. I reckon the runway ahead could be long and arduous for the business. And that makes it difficult to put a value on the company now.

I’m cautious about Rolls-Royce shares and will watch events from the sidelines for now. We can find out more with the full-year results report due on 11 March.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any share 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.

More on Investing Articles

A senior man and his wife holding hands walking up a hill on a footpath looking away from the camera at the view. The fishing village of Polperro is behind them.
Investing Articles

3 shares that could help a SIPP double in value

Christopher Ruane discusses a trio of FTSE 100 shares that he thinks investors should consider for their long-term potential to…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

I’ve doubled my money on this growth stock but I’m not selling it any time soon

Uber has been a great investment for Edward Sheldon, rising more than 100% in just two years. He believes the…

Read more »

British union jack flag and Parliament house at city of Westminster in the background
Investing Articles

The FTSE 100 is on fire! Yet these 2 stocks still look cheap to me

Despite the FTSE 100 hitting record highs, there’s no shortage of undervalued opportunities across the index, says Ben McPoland.

Read more »

Female student sitting at the steps and using laptop
Investing Articles

Greggs shares: an outstanding bargain after crashing nearly 40%?

Shares of one-time market darling Greggs have been in foul form recently. But is this a once-in-a-blue-moon opportunity for our…

Read more »

Close-up of children holding a planet at the beach
Investing Articles

This FTSE 100 stock’s suddenly become the highest-yielder on the index!

The league table of FTSE 100 (INDEXFTSE:UKX) dividend stocks has a new number one. But our writer explains why there…

Read more »

Rear View Of Woman Holding Man Hand during travel in cappadocia
Investing Articles

Is this under-the-radar UK stock as cheap as its rooms?

Our writer’s been keeping an eye on a little-known UK stock that operates in a niche, but profitable, sector of…

Read more »

Young Caucasian woman holding up four fingers
Investing Articles

It’s a ‘Fabulous Friday’ for holders of these FTSE 100 shares!

Four members of the FTSE 100 (INDEXFTSE:UKX) are making their latest dividend payments today (11 July). Our writer takes a…

Read more »

Man riding the bus alone
Investing Articles

Check out this spectacular FTSE 250 stock

UK investors willing to look beyond the FTSE 100 can find some outstanding companies. Online advertising business Baltic Classifieds might…

Read more »