Over the past year, whenever I’ve covered the Rolls-Royce (LSE: RR) share price, I have consistently concluded that I would be happy to buy the stock as a speculative investment.
I continue to hold this view. And there are at least three reasons why I think the shares are worth buying today.
Rolls-Royce share price: reputation
I think the firm’s biggest asset is its reputation. Not only is it one of the most storied engineering companies in the world, but it also has a vast intellectual property archive. This intellectual property archive spans everything from aircraft engines to nuclear submarine reactors.
This technology is incredibly valuable, and I think it could be worth far more than the market is giving the stock credit for. It would be virtually impossible for any competitor to recreate this technology in a short space of time.
This is the primary reason why I’d buy the stock as a speculative investment.
Steady cash flows
I’m also attracted to the Rolls-Royce share price for its business model. The group’s most significant business division is aviation. This entails the production and sale of engines to the civil aviation industry.
The company doesn’t actually make money on each engine it sells. It sells each one at cost and also sells the buyer a lifetime service contract. This is where the real money’s made. For the life of the engine, the business pays Rolls a service fee. The fee increases the more time the unit spends in the sky.
In theory, this business model can be incredibly lucrative. However, it was only really just starting to pay off when the pandemic struck. I’m confident that Rolls’ business model will yield results for the company and its investors in the long run.
National champion
The third and final reason I’ve always been interested in the Rolls-Royce share price is that the company is a national champion. I think it’s unlikely the government will ever let the business fail and will do whatever it takes to keep it alive. That could remove the worst-case scenario of bankruptcy for investors.
These are the reasons why I think the stock looks attractive. Nevertheless, I’m also well aware this enterprise faces many risks, which could hold back its recovery.
For example, it has a weak balance sheet that’s loaded with debt. Further, there’s no telling how long it’ll be before the aviation industry recovers to 2019 levels of activity. Rolls can’t make the most of its business model if aircraft orders remain depressed.
The company also has a relatively high cost base. Management has been trying to bring costs under control over the past year by slashing jobs. Unfortunately, these efforts could take some time to bring results.
These risks, as well as the advantages outlined above, are the reasons why I rate the stock as a ‘speculative buy’.
