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The Rolls-Royce share price is a steal at £1.33. Here’s why

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A Rolls-Royce employee works on an engine
Image: Rolls-Royce

The Rolls-Royce (LSE: RR) share price has struggled to recover from the pandemic crash of 2020. Lockdowns, reduced orders and supply chain issues have kept it from operating at its full potential. However, we’ve seen announcement after announcement this year of new partnerships and high-value deals. All of these, combined with the current share price, make me think that Rolls-Royce could be a steal.

Key Details

Rolls-Royce is a world-famous aeronautics engineering company. Its shares trade at over 133p as I write this and the company has a very enviable price-to-earnings (P/E) ratio of 3.32. Its market cap is just over £11bn.

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Rolls-Royce has struggled somewhat over recent years. The pandemic took its toll on the share price but gross profits had been on a downward trajectory since 2017. However, Rolls-Royce has gone on a partnership spree, bringing in billions in much-needed revenue that will pay dividends well into the future.

Partnerships and deals

Earlier this year, Rolls-Royce and the United States Air Force announced that they’d struck a potentially multibillion-dollar deal. Rolls-Royce will now refit and service a new line of engines for the US’s bomber fleet. The contract includes an initial $500m for six years of work but it’s open ended, meaning that the contract could be worth a total of $2.6bn (or £1.9bn).

In addition to that, Rolls-Royce has signed a $400m deal to refit Vietnam’s VietJet planes with new engines. Although not as flashy as a multibillion-dollar contract, this deal also includes ongoing service and maintenance of the aircraft.

Rolls-Royce also sold off its Spanish business ITP for an additional £1.5bn. Doing so has reduced operating costs while bringing in a single lump sum.

However, what I like most about the firm is how it chooses to reinvest its profits, rather than spend money on share buybacks or dividend payments. Just last week, the company opened an $11m naval facility in Massachusetts, which will repair, maintain and overhaul ships for the US navy on an ongoing basis. The facility will hopefully become a consistent revenue stream.

But the most important of these announcements was made the other day. Qatar will partner with Rolls-Royce to funnel billions of dollars into new, green energy start-ups within the UK. Details on this partnership are thin on the ground for now, but funding is expected to continue for more than 20 years, while employing Rolls-Royce’s expertise.

The deal has yet to be finalised, but as a contributor and partial owner of these new ventures, Rolls-Royce is positioning itself reap financial rewards for years to come.

Concerns

My biggest concern with has to be RR’s record of spotty profitability. Unlike tech stocks, which usually only need to employ a small number of software engineers, manufacturing is an expensive business. The firm must hire highly technical skilled workers, purchase enormous amounts of raw materials and rent large factories. Then it must ship heavy but delicate pieces of machinery all around the world. This puts it in a precarious position with a large number of overhead costs. If anything upsets that balance, revenue and profits tumble dramatically.

Investing in new industries is also risky. It could be years before the start-ups see profits, or are successful at all.

But, for me the potential upside outweighs the risks and I will be adding Rolls-Royce to my portfolio.,

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James Reynolds has no position in any of the shares mentioned. 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.

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