Over the last month or so the Rolls-Royce (LSE: RR) share price has fallen nearly 15%. That’s worse than the 5% of the FTSE 100. Over 12 months the fall is 60%. So why have the shares continued to fall? Should investors be worried?
Reasons for the Rolls-Royce share price decline
New variants of Covid are a source of concern. Although the UK is doing well with the vaccine rollout, many other countries are struggling and there are supply constraints, as the EU/AstraZeneca row highlighted.
And the UK, South Africa and Brazil variations have all reignited pandemic concerns. That has implications for travel and, by extension, for Rolls-Royce.
A January trading update from the engineer has probably also weighed on the share price. The company revised down forecasts for widebody engine flying hours to 55% of 2019 levels from a 70% estimate last October. It added to this by saying that it expected to lose £2bn in cash as a result. Cashflow was something it was looking to improve, so the setback, while understandable in the context of Covid-19, is still disappointing.
Yet emerging technologies like modular nuclear power and electric aircraft could offer a way forward for Rolls-Royce and boost the shares.
But for now, the virus dictates the future of the Rolls-Royce share price. The company can invest in nuclear, marine and other industries to offset some of the aviation losses, but investors (including me) still seem concerned about the company’s flying prospects in the short term, at least.
What I plan to do about this potential value share
I’m also a little concerned. Even in light of the Rolls-Royce share price being cheaper than it was a month ago and far less than it was a year ago, I’ll avoid the shares. For me they carry too much risk, and a recovery is too fragile.
In some ways RR resembles a value share, as it has fallen so much in the wake of challenging trading conditions and the its poor financial performance. With multiple problems to contend with, I’d rather invest in some shares with strong growth potential, rather than the volatile Rolls-Royce share price.
An alternative FTSE 100 share
One share that I’d rather invest in is the high-yielding insurer, Aviva (LSE: AV). A new CEO is slimming down the business, which should make it easier to manage, and perhaps even attract a takeover from a larger company. That’s happened within the industry, for example with RSA Insurance, so there is a precedent. The shares have a dividend yield of 3.79% and it also seems to show signs of being good value with a P/E of just five.
As a financial share it was particularly hard hit in the sell-off about 12 months ago. That means there’s plenty of room for a share price recovery if the economy improves, I think. On the downside there’s a risk it could underperform if the economy remains weak. Also, its disposals mean it’s now more reliant on the UK and Ireland for earnings so any poor performance here could hurt the share price.
Overall though, I’d prefer to add Aviva shares to my portfolio as the Rolls-Royce share price still looks very volatile.
Andy Ross owns no 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.