The Rolls-Royce share price is down 66% this year. Here’s what I’d do now
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The aviation industry has had quite a year. Covid-10-related travel restrictions have battered airlines and plane makers.
One of the FTSE 100‘s biggest losers over the last 12 months is British Airways owner IAG (LSE:IAG). FTSE 250-listed easyJet has also seen its share price plummet.
An unwelcome addition to that list is British favourite Rolls-Royce Holdings (LSE:RR.). The Rolls-Royce share price has been hurt badly over the last year. It is now down 61% compared to last February.
The company announced it is closing its jet engine factories for two weeks this summer to save cash. This will affect 19,000 staff members in its civil aerospace branch.
How has Rolls-Royce negotiated the pandemic?
Rolls-Royce’s balance sheet has been badly affected by the crisis as its airline customers have grounded planes. The company’s profits are closely linked to how many hours their engines are in flight. With engine flying hours down 42% in 2020, it has had to make cost savings of more than £1bn.
Despite all the doom and gloom, some analysts see the current Rolls-Royce share price of 91p as extremely attractive. In a broker note on Thursday, analysts at Deutsche Bank turned bullish on the stock. The German bank said it had seen early signs of recovery in domestic markets and that it expects vaccine rollouts to spark a recovery in airline travel. Forecasts, of course, can change based on future developments and can’t be relied on.
My own outlook isn’t so enthusiastic outlook for the short term, but I do believe airline travel will return to a version of normality in the long term.
Is the grass greener on the other side?
Some other Fool commentators have suggested the shares could rise based on Rolls-Royce’s early involvement in a move towards electric jet engines. I think it’s still too early to say where that will go just yet — the technology is only at the stage of flying 200 miles on a single charge.
Energy companies will be coming under increasing pressure from governments in coming years to adopt greener energy models. The fact that Rolls-Royce is already investing in electric vehicles is positive, and the growth potential could be massive in this area.
Rolls-Royce has traditionally been considered a ‘quality’ stock, but it wouldn’t be the first time such a traditional name flopped in the stock market.
The group is still cautious about its outlook. In its most recent trading update, it said: “Enhanced restrictions are delaying the recovery of long-haul travel over the coming months compared to our prior expectations, placing further financial pressure on our customers and the wider aviation industry, all of which are impacting our own cash flows in 2021”.
That doesn’t inspire me with the confidence to add Rolls-Royce shares to my portfolio right now. While cash flow has improved somewhat, I still see the price as too unstable for me. I will be keeping a close eye on the stock as 2021 progresses though.
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conorcoyle owns shares of easyJet. 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.