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The Rolls-Royce share price is down 10% in the past month. Is this stock now undervalued?

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The Rolls-Royce (LSE: RR) share price currently rests at 128p, a 10% decrease from the 142p it sat at in early November. This is due to the rising investor fears of the emerging Omicron variant. However, the company’s FY21’s half-year results highlight a focus on financial restoration, evidenced by a large cash flow generation. This explains the 32% rise in share price in September alone.

A look at Rolls-Royce’s considerable increase in liquidity and research development suggests further potential for this stock. I am now encouraged to consider this past month’s price decrease as a buying opportunity. But with a trading update due December 9, how high can the Rolls-Royce share price go?

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Operational risk 

The company has been continuously challenged by the pandemic’s headwinds on operational construction and cut back on product demand. Rolls-Royce’s annual report for FY20 highlights the company’s struggles with the pandemic, reporting a decrease in underlying revenue from £16,875m to £11,824m across the year. This resulted from the negative impacts on airline demand from coronavirus restrictions.

The Omicron variant suggests further problems ahead. Yet such problems are market-wide, with the FTSE 100 index dropping 4% in late November. This explains the similar price drop in the Rolls-Royce share price. But a focus on its long-term development shows this company to be very well equipped to tackle this new coronavirus variant.

Managerial development

Extensive financial development is a promising feature for this aerospace company. Despite revenue losses, recent targeting of research and other revenue streams has met managerial aims for financial restoration.

A look at the half-year report shows underlying revenue to have only decreased from £5,410m in H1-2020 to £5,227m in H1-2021. Indeed, the company has significantly dropped the revenue decrease suffered during 2019-20. Rolls-Royce has also shifted its focus onto more stable and prospective areas. For example, an increase of £43m in research and development costs suggests the company is adjusting aims toward future expanse. A 4% rise in Defence revenue highlights the ongoing restructuring designed to counteract the impacts of the virus on the aerospace market. 

Would I buy Rolls-Royce shares?

A commitment to operational reduction and equity increase has certainly contributed to the value of  Rolls-Royce stock. As seen in the half-year report, an 8,000 (of a target 9,000) role reduction has been achieved. This has contributed to the £0.9bn decrease in net debt. Additionally, the £1.7bn increase in free cash outflow has placed the company’s overall liquidity in a strong position. Rolls-Royce’s price-to-earnings ratio is now around 15. This suggests the company may be undervalued, particularly if profits continue to recover.

Rolls-Royce’s revenue and operation has suffered throughout the past year. However, the success of recent financial management has established a concise direction out of this prolonged pandemic. This leads me to have high hopes for the trading update due December 9. Overall, I consider this past month’s dip in share price a great buying opportunity for my investment portfolio.

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Hamish Cassidy 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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