The Rolls-Royce (LSE: RR) share price has failed to join in on the the recent FTSE 100 recovery. At 91p per share, the engine builder remains firmly in penny stock territory and down 15% on a 12-month basis.
Investors have taken fright as the Russia-Ukraine conflict has raised new troubles for the commercial aviation industry. News of major boardroom changes at Rolls-Royce haven’t exactly improved the mood either. Yet at the current price, could the engineer be worth a closer look?
City analysts expect earnings to rocket in 2022 and this leaves the Rolls-Royce share price on a price-to-earnings growth (PEG) ratio of 0.1. Any reading below 1 suggests a stock could be undervalued.
Fresh fears hit Rolls-Royce’s share price
First let’s look at the bad stuff. And it’s clear that the tragic conflict in Ukraine has created some bad turbulence for Rolls-Royce. The sanctions placed on Russia threaten the fragile economic recovery and by consequence the near-term outlook for aviation activity. It’s also driven inflation even higher in an extra blow to consumer confidence.
Soaring oil prices in particular are a threat to the airlines as they push up operating costs. Travel operators can pass these costs onto passengers, of course, but this would hit ticket sales even harder.
The war in Ukraine isn’t the only immediate threat to the aviation industry either. Covid-19 decimated profits at Rolls-Royce but earnings rebounded strongly in 2021 as mass plane groundings gradually unwound. However, confidence in the recovery is wobbling as coronavirus cases in China explode, raising the prospect of fresh waves of infections across the globe.
Look east
As I say, Rolls-Royce’s share price hasn’t been helped by high-level management changes either. Last month, chief executive Warren East announced his resignation from the firm with effect at the end of 2022.
The timing of East’s departure couldn’t be worse in light of those aforementioned threats. He steered Rolls-Royce through the initial crushing threat of Covid-19 and massive restructuring last year. East also took steps like embracing green technology to safeguard the company’s long-term future during his eight years at the top.
Reasons to buy Rolls-Royce
On the plus side, Rolls-Royce’s embrace of clean technologies is something that appeals to me as an investor. Sales of its low-polluting UltraFan plane engines for instance could soar when they come onto the market in 2025. Demand for its small-scale nuclear reactors might also rocket as countries try to meet their net zero targets. Britain for example is looking to generate a quarter of all power from nuclear by 2050, Prime Minister Boris Johnson said earlier this week.
There are other reasons to like Rolls-Royce too. Orders of its plane engines could rise strongly over the long term as rising emerging market wealth turbocharges global commercial aviation growth. Demand for its technology from the defence sector is also likely to remain strong as the geopolitical landscape evolves.
Still, it’s my opinion that the hazards facing Rolls-Royce remain considerable. This is made all the worse by the fact that debt at the firm remain at elevated levels (£5.2bn worth as of December). Rolls-Royce’s mega-cheap share price remains a reflection of its high risk profile so I’ll continue to avoid it.
