The Rolls-Royce share price has plunged 18% in 2022. Is it too cheap to ignore?

The Rolls-Royce share price has crashed following news that the CEO will be stepping down soon. Is this now the perfect buying opportunity?

| 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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Rolls-Royce (LSE:RR) share price was hammered on Thursday as it fell over 18% on the news of CEO Warren East stepping down after nearly seven years at the helm, and showed only a small rebound on Friday morning. The FTSE 100 engine manufacturer has not only had a bad week but a bad three years, with the share price down 68% from February 2019.

Is the share price overreacting?

Some positives can be taken from the recent earnings report that show some hope for the Rolls-Royce share price. A major restructuring programme, undertaken by the departing CEO, saw a streamlining of operations with 9,000 jobs cut and unnecessary costs eliminated. This restructuring has helped Rolls-Royce turn a £4bn loss in 2020 to a small but important £124m profit in 2021.

The company has cut down on its cash-intensive operations and costs and saw only £1.5bn in cash leave the company in 2021 compared to a massive £4bn the year before. This strengthening of cash flow makes the company less reliant on taking on further debt to finance current operations and will boost future financial health.

Rolls-Royce’s power-by-the-hour business model, where airlines pay a flat rate per hour flown with Rolls-Royce engines, has harmed the company during the pandemic, with large fleets of grounded jets. However, as the travel industry prepares for a summer with loose travel restrictions, the skies will be filled once again and Rolls-Royce will be the recipient of a steady stream of income.

Further turbulence ahead for Rolls-Royce?

Rolls-Royce was forced to take on over £7bn in debt over the pandemic and sees current debt at £5.2bn, which is no small sum. As a term of some of the loans taken, Rolls-Royce is not allowed to pay a dividend until at least 2023 and I wouldn’t be expecting one until at least 2025 considering current financial instability. As a result, there are other FTSE 100 shares I’m turning to when I’m looking to boost my dividend income stream.  

The news of CEO Warren East stepping down at the end of the year understandably harmed the Rolls-Royce share price, and it could suggest some deeper concerns for the FTSE 100 giant. East trimmed down costs and made the company profitable but is now jumping ship — this could indicate a lack of direction in the senior management team.

Am I investing today?

I believe that the drop in the Rolls-Royce share price has been a slight overreaction but there are still legitimate concerns about the health of the company. The restructuring efforts, positive earnings report and a good summer for air miles all indicate brighter skies ahead.

Despite all this, I am only adding Rolls-Royce to my watch list considering the shifts in leadership, high debt, and absence of a dividend. I believe the risks outweigh potential opportunities at this moment in time.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Finlay Blair 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

Investing Articles

The National Grid share price nosedived 21% in 2 days! Is it time to take advantage?

The National Grid share price tumbled after the company surprised shareholders by revealing plans to raise more money via a…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Dividend Shares

How I’d try to ironclad my second income before interest rates fall

Jon Smith explains a couple of tactics he's looking to implement in his dividend portfolio to try and protect his…

Read more »

Investing Articles

The FTSE 100 still looks cheap to me. But don’t just take my word for it!

The FTSE 100 (INDEXFTSE:UKX) has increased 7.5% since the start of 2024. But I think there’s evidence to suggest that…

Read more »

Investing Articles

What should the Vodafone share price be? Here are 3 possible answers

Our writer uses a number of popular financial measures to come up with an estimate of a fair value for…

Read more »

Investing Articles

Here’s how much I’d have if I’d bought 1,000 shares in this FTSE 100 defence stock 5 years ago

I could have made a pretty penny investing in this leading FTSE 100 defence stock. Now I’m looking at a…

Read more »

Investing Articles

1 potential millionaire-maker UK stock I’d like to buy for the long haul

For long-term investors, here’s 1 UK stock to consider buying right now with the potential to help power a growth…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

These cheap UK shares look way too good to ignore right now

With the UK stock market reaching new highs recently, this Fool plans to grab these two remaining cheap shares before…

Read more »

Young Woman Drives Car With Dog in Back Seat
Investing Articles

This unloved UK stock could rise 120%, according to a City broker

Some City analysts reckon a once-popular UK stock can recover from its massive recent decline and go on to more…

Read more »