It doesn’t take a genius to say that we’re living in strange times at the moment. Take investing as an example. I like to think I have a good nose for a bargain, but are current market conditions and general uncertainty making me doubt my own judgement? Have a look at Rolls-Royce (LSE:RR). In normal times, I would see the Rolls-Royce share price as nothing but an amazing long-term bargain. Why is is that I have doubts now?
Back in 2018, Rolls-Royce traded at a high of 375p. It now trades at around the 125p-130p mark. A very simplistic starting point is to ask myself whether or not I feel Rolls-Royce is genuinely a third of the company it was back then.
Pandemic struggles hit the Rolls-Royce share price
The Rolls-Royce share price tanked at the start of the pandemic, along with many other companies, but it actually hit its lowest spot in October 2020. Rolls-Royce revenues were hit hard by reduced airline flying time, with the company producing and maintaining aircraft engines for fleets across the world. Reduced flying time continues of course around the world and this is bad for the Rolls-Royce business. Old aircraft engines don’t need replacing as often because they haven’t been used. Existing engines don’t need servicing as often either.
There is room for cheer on that score, though. Increased confidence in airline stocks since the markets reopened this New Year reflect a level of optimism not seen in the airline industry in the past couple of years. This is good for Rolls-Royce, which will find demand for its services increasing over the medium to long term.
The problems Rolls-Royce have faced mean that there is no prospect of a dividend in the near future. A dividend cannot be paid until at least 2023 owing to loan agreements. This is clearly a negative point. However, it could be that the lack of dividend is pinning the share price down at an artificially low level. Reintroducing a dividend when the time is right should – all things being equal – give the Rolls-Royce share price a nice kick in the right direction.
Huge barriers to entry could mean a bargain
There is more to the longer-term prospects of Rolls-Royce than just the international travel market picking up again. Longer term, Rolls-Royce retains a very strong position within its industry. Rolls-Royce has few competitors thanks to barriers of entry bigger than the engines it produces, so if it can weather the current storm, the relative safety of the company looks assured longer term.
Rolls-Royce has done plenty in 2021 to restructure and streamline in order to protect cash flow. Besides the aforementioned loans, the company also has reliable revenue coming in from government defence contracts.
All things considered, I should probably trust my judgement and be confident in saying that the Rolls-Royce share price is a longer-term bargain. If I do get involved, I will get involved knowing I am in it for the long haul.
