Talking about the Rolls-Royce (LSE:RR) share price is one of those conversations that investors like me love to have. It’s a legendary British brand that has suffered heavily from mismanagement in recent years. But it appears to be roaring back to health.
In March 2021, I wrote that the Rolls-Royce share price could be amazing value for my ISA. I noted at the time, when the company was trading at 106p, that despite a £2bn debt burden I’d certainly consider it. That figure, incidentally, is almost exactly where the share price is now in late June 2021.
Had I bought then, I wouldn’t be sitting on great gains. But I wouldn’t have lost anything either. And I’d argue that the aerospace and defence company looks in even better condition now than it did then.
Nosedive or soar?
But let’s consider some negatives first. It’s important to us as investors to try not to be swayed by confirmation bias. We must always ask difficult questions if we’re going to make the most of our money.
Rolls-Royce’s Spanish subsidiary ITP Aero is up for sale for around €1.5bn. According to recent news reports, two private equity giants Bain and Cinven are battling it out to land the deal.
ITP pulled in €735m in revenue in 2020, but still made a loss of €13m.
Selling the Basque aircraft engine supplier would bring much-needed cash into Rolls-Royce coffers. It comes at the loss of future revenues, of course. The company can’t benefit from a subsidiary it no longer owns. But more important to the British brand right now is to balance the books. Rolls-Royce expects to spend £4.2bn in cash in 2021, remember.
From the depths of pessimism in October 2020, the Rolls-Royce share price is actually up 170%.
If the deal fails? I’d rethink any investment. That hefty debt pile will only get more costly to manage as time goes on.
New broom sweeps clean?
Anita Frew coming in as the group’s first ever female chair on 1 October 2021 gives me some hope. She has a pretty great pedigree, as chair of the FTSE 100-listed £10bn market cap chemicals group Croda.
Her reputation both with institutional investors and government contacts “will be invaluable”, company director Sir Kevin Smith told press on her appointment. Righting the Rolls-Royce share price — and the wider business — seems more likely with Frew at the helm.
In recent weeks the Rolls-Royce share price has stabilised. I see more upside on the table if the company is able to clear some of the massive debts it has accrued.
What to watch
2021 half-year results are due out on 5 August. I’ll wait until I see fresh figures on margins and profitability before laying down precious cash.
On 15 June analysts at broker Berenberg picked Rolls-Royce as the “value play” in civilian aerospace. Its defence capabilities may be better known, but I’d tend to agree. After all, the company pulls in more than 40% of its underlying revenue from this sector.
And Berenberg’s 150p target price for the Rolls-Royce share price may be overly optimistic, given the company’s high cash burn. That’s a definite ongoing risk. But with these other ducks lining up nicely, I’m looking closely for an entry point with the Rolls-Royce share price today.
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.
Tom Rodgers has no position in the shares mentioned. The Motley Fool UK has recommended Croda International. 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.