I have to say that whenever the Rolls-Royce (LSE: RR) share price is below the rather arbitrary 100p per share level, I’m tempted to look into whether buying the shares is worthwhile. Well, that’s the case right now. At the time of writing the shares have dipped to around 90p. Hard to imagine that five years ago, the shares were 250p and at the start of 2020 they were 233p. A lot has changed since then.
Are there reasons for optimism?
One of the biggest potential reasons to be cheerful has to be around the resumption of travel. With many Britons double vaccinated, holidays could be back on the cards. Although restrictions in other countries and slower progress in long-haul destinations like Australia may hold back progress towards travel resuming as normal anytime soon.
Rolls-Royce is likely to accelerate away from a reliance on commercial airlines and exciting new technologies like modular nuclear power stations, as well as more work in the defence industry, could make earnings more reliable and stable.
Given how badly the shares have done, there’s the paradox that any good news – especially any pleasant surprises – could well see the Rolls-Royce share price do well. I suspect expectations are now so low that there could be significant upside.
The CEO has been at Rolls-Royce since 2015, so there’s a steady hand at the helm. At this difficult time a settled and competent management team is absolutely vital and I think it’s reassuring to any investor. Once the worst of the pandemic is over Roll-Royce can once again target better cash flow. All that said, its chair is set to change later on this year, but hopefully by October we’ll be starting to see more air travel and Rolls-Royce getting off its knees.
The bad news for the Rolls-Royce share price
It’s much easier to find bad news. Revenues are unlikely to recover to anywhere near normal levels soon. In 2022 it’s forecast revenues will still be significantly below where they were in 2015. The company has been loss-making for the last few years and margins have fallen through the floor.
Not all the problems with the Rolls-Royce share price can be blamed on the pandemic. Remember, the Trent engine problems meant the engineer was hemorrhaging money before anyone had heard of Covid-19.
For now, given it makes so much money from how many air miles planes fly, Rolls-Royce remains at the mercy of the pandemic.
Would I invest?
That’s why on balance I think there are better investments than Rolls-Royce out there. Given the challenges the company faces, I think buying the shares is a gamble and one I’m personally unlikely to take. But if the shares dip even further, I may reconsider that view as a rather contrarian long-term investment.
