Rolls-Royce (LSE: RR) is a popular stock at the moment. Last week, RR was the most purchased stock on both Hargreaves Lansdown and AJ Bell Youinvest.
Should I buy Rolls-Royce shares for my own portfolio? Let’s take a look at the investment case for the FTSE 100 stock.
Rolls-Royce shares: two reasons to be bullish
I can see a few reasons to like Rolls-Royce shares right now. For starters, the stock is a classic ‘reopening’ play. Rolls-Royce generates a large proportion of its revenues from the servicing of jet engines. So the company should benefit as the world reopens and the travel industry picks up. Recently, it said it’s positioned well for the rebound in international air travel.
It’s worth noting that in June, analysts at Jefferies listed Rolls-Royce as one of their top picks for the ‘post-pandemic growth cycle’. With economic activity picking up, Jefferies expects some companies to embark on a period of bonanza, and Rolls-Royce is one of them.
And Jefferies isn’t the only brokerage that likes Rolls-Royce shares at present. Recently, Berenberg listed the stock as a ‘buy,’ saying that significant restructuring across the aerospace sector driven by the pandemic will create opportunities for investors. “Despite the delayed recovery in air traffic, demand signals are firmly positive,” its analysts wrote in a research note.
Another reason to like Rolls-Royce is that it’s working hard to become a more ‘sustainable’ company. Last month, the company outlined plans to reach net zero emissions by 2050 by investing more in decarbonising technologies and, in the short term, using more sustainable aviation fuel. To ensure it reaches that target, the company plans to lift its research and development spending on low carbon and net zero technologies to 75% of its total budget by 2025, from around 50% now.
Meanwhile, on 30 June, Rolls-Royce announced it will be partnering with oil giant Shell to work on the development of sustainable aviation fuel, in line with both their plans for net zero emissions by 2050. The pair signed a memorandum of understanding (MoU) which Rolls-Royce said would help with plans to certify 100% sustainable aviation fuel (SAF) for use in planes.
It’s also worth pointing out that Rolls-Royce appears to be progressing with its high-performance electric aeroplane. The company recently said we can expect to see the first flight in the coming weeks.
Is RR a good long-term investment?
I do have one big concern about Rolls-Royce shares however, and that’s the company profitability track record. It was having problems with its profitability well before Covid-19. In 2016, for example, it generated a net loss of £4bn.
What stands out to me is that Rolls-Royce’s five-year average return on capital employed (ROCE) figure is -3%. That’s very poor. History shows companies that generate low returns on capital are generally not good long-term investments.
Rolls-Royce shares: should I buy?
I think Rolls-Royce shares could have some upside in the short term as the world reopens. However, as a long-term investor, I’m looking for more than short-term gains. Given its historically low ROCE, I’m not convinced RR is a good stock to own for the long term.
So I’m going to leave the shares alone for now. I think there are better stocks to buy.
Edward Sheldon owns shares of Hargreaves Lansdown. The Motley Fool UK has recommended Hargreaves Lansdown. 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.