The Rolls-Royce share price is down 27% in 2022. Should I buy?

After the recent crash, the Rolls-Royce share price is getting close to being too cheap for me to miss. Here’s why I am bullish on the engineering firm now.

| 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.

After a 10% resurgence in 2021, British engineering company Rolls-Royce (LSE:RR) looked set to carry this momentum forward to 2022. But its share price is down a whopping 28% this year. Analysts say this is a result of the Omicron spread, escalating political tensions and CEO Warren East’s decision to quit the company at the end of 2022. Now trading as a penny stock, is the Rolls-Royce share price the best long-term FTSE 100 bargain for my portfolio right now?

Steady improvements

While the pandemic hit the aviation industry hard, 2021 was largely a year of recovery. Rolls-Royce reported a marked increase in flying hours in the second half of 2021, which helped the company edge closer to a positive cash flow. With the civil aviation sector still a long way off pre-pandemic levels, the company also went through a massive restructure in a bid to diversify its income stream.

The company shed nearly 9,000 staff members, sold smaller holdings and streamlined the aerospace arm of the business. But since large planes were still mostly grounded last year, civil aviation recorded a net loss of £172m last year. But this is a vast improvement from the £2.5bn net loss in 2020, thanks to the restructuring efforts.

Overall, Rolls-Royce managed to generate an operating profit of £414m in 2021 primarily due to its defence wing. In fact, global weapons spending has increased a lot in the last decade and Rolls-Royce benefited from this. Defence equipment sales generated £457m last year and the current order book value stands at £6.5bn.

Prolonged recovery

But I see a big concern with the Rolls-Royce share price at the moment. The company still has a huge debt pile. Although recent disposals are expected to generate around £2bn in proceeds, the current debt pile stands at a whopping £5.2bn. Given how volatile the share price has been over the last 24 months, I think even a slight misstep by the company or another Covid setback this year could force a panic-sell.

While this is a concern for me, I’m looking at a long-term play with the Rolls-Royce share price. And I think the company has some impressive projects that are coming to fruition at the right time.

With the electric vehicle (EV) revolution under way, Rolls-Royce is pioneering an electric aircraft that has already broken three world records for being the world’s fastest all-electric aircraft. And this project already has pre-orders worth $5.2bn from some of the largest commercial airlines in the world. If this project takes off, RR could attain Tesla-like status in the electric aircraft space.

The company is also developing Small Modular Reactors (SMRs) to create remote power stations that can generate clean energy.  The board expects first orders in a couple of years and grid integration in the UK in the 2030s. As of now, one SMR can produce 230 tonnes of clean Hydrogen fuel a day.

Both the EV and green energy sectors are expected to grow significantly in the next decade. And given RR’s history of engineering R&D, I think it is a real possibility that these projects successfully reach the market. Although the Rolls-Royce share price is volatile right now, I see a lot of long-term potential here. I would consider an investment if the share price falls below 80p in the coming weeks.

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.

Suraj Radhakrishnan 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

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »