Is the Rolls-Royce share price still too cheap?

The Rolls-Royce trades just above penny stock territory despite expectations of soaring profits. Is now the time for me to buy the FTSE 100 laggard?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

A Rolls-Royce employee works on an engine

Image: Rolls-Royce

Rolls-Royce Holdings (LSE: RR) has had its fair share of problems over the past two years. The misfortunes of the travel industry due to Covid-19 have smashed profits and caused the business to rack up enormous debts. The Rolls-Royce share price is down around 50% since the start of 2020 as a result.

Mass vaccination rollouts have fuelled hopes of a recovery in the aviation industry more recently. And as a consequence Rolls-Royce’s share price has sprung 19% higher over the past 12 months. But a case can still be made that the engine manufacturer remains too cheap at current levels of 125p.

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

Why? Well City analysts think Rolls-Royce’s profits will soar 210% year-on-year in 2022. This leaves it dealing on a price-to-earnings growth (PEG) ratio of 0.1. A reading below 1 suggests that a stock is undervalued considering its growth prospects, according to investing theory.

Reasons to buy Rolls-Royce shares

Fans of Rolls-Royce will argue that the skies are much clearer for the FTSE 100 firm looking ahead. Broker projections that annual earnings will rise an extra 5% in 2023 lend extra weight to hopes of a steady recovery.

In a key litmus test for the aviation industry aeroplane orders are beginning to rise strongly. Boeing announced last week it had chalked up 909 gross jet orders in 2021. That’s double the number the US planebuilder recorded in 2020 and 2019 combined. As one of the industry’s leading engine builders this is naturally excellent news for Rolls-Royce.

I also believe Rolls-Royce’s increasing focus on environmentally-friendly technologies could pave the way for big profits. Its plans to build a swathe of small-scale nuclear reactors across the UK will help the government to meet its emissions targets. It will also provide a bit more strength through industry diversification (in other words reducing the company’s reliance on the cyclical aviation industry).

The company is also creating less-dirty engines for aeroplanes and other vehicles. Its UltraFan plane engine, for example, is 25% more fuel efficient than a first-generation Trent engine.

On the other hand…

Rolls-Royce is clearly in a better place than it was a year ago. But I still have nagging doubts about investing in the company myself. It’s one of the UK’s most enduring engineering success stories, though outside circumstances mean Rolls-Royce is now saddled with debt (net debt stood at almost $5bn in June).

These massive debts could significantly hamper the company’s growth plans. They’ll be even more problematic if the Covid-19 crisis drags on and fresh travel restrictions ground planes again en masse. I can envisage Rolls-Royce adding to its debts or even tapping shareholders for more cash in this scenario just to keep the lights switched on.

The Rolls-Royce share price is cheap, sure. However, I believe this reflects the significant near-term risks facing the FTSE 100 firm and its buckling balance sheet. There are plenty of other cheap UK shares I’d much rather buy today.

Our 5 Top Shares for the New “Green Industrial Revolution"

It was released in November 2020, and make no mistake:

It’s happening.

The UK Government’s 10-point plan for a new “Green Industrial Revolution.”

PriceWaterhouse Coopers believes this trend will cost £400billion…

…That’s just here in Britain over the next 10 years.

Worldwide, the Green Industrial Revolution could be worth TRILLIONS.

It’s why I’m urging all investors to read this special presentation carefully, and learn how you can uncover the 5 companies that we believe are poised to profit from this gargantuan trend ahead!

Access this special "Green Industrial Revolution" presentation now

Royston Wild 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.

More on Investing Articles

A person holding onto a fan of twenty pound notes
Investing Articles

3 top dividend shares to beat a new recession

I believe that good dividend shares are my best approach to keeping my money safe in a recession. Here are…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

Down 80%, this growth stock is a ‘no-brainer’ buy

Growth stocks have faced a torrid time recently. However, after falling 80% since its highs, this FinTech looks too cheap…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Warren Buffett is pouring money into stocks! Here’s a FTSE 100 pick I think he’d buy

Warren Buffett has been investing in several US stocks recently. Here's a FTSE 100 stock I think he'd also be…

Read more »

A Rolls-Royce employee works on an engine
Investing Articles

Is the Rolls-Royce share price on the verge of recovery?

A recent trading update showed the company is benefiting from increased flying hours, so will the Rolls-Royce share price soon…

Read more »

Girl showing thumb up, excited about upcoming shopping
Investing Articles

Is now a good time to buy Tesco shares?

After a strong rally last year, the Tesco share price has stalled. Roland Head gives his view on investing in…

Read more »

The BT Tower looming above London's skyline
Investing Articles

3 reasons to buy – and not buy – BT Group shares

The BT Group share price has a rock-bottom valuation right now. Is this a red flag or does it make…

Read more »

macro shot of computer monitor with FTSE 100 stock market data in trading application
Investing Articles

2 cheap FTSE 100 dividend shares! Should I buy?

These two FTSE 100 dividend shares offer terrific value for money, on paper. Should I load up on them today,…

Read more »

Cheerful young businesspeople with laptop working in office
Investing Articles

5 steps to target a monthly £300 passive income

With his eyes on a target of monthly passive income, here are five steps our writer would take to try…

Read more »