Here’s why Rolls-Royce shares are down 32% over the past 6 months!

Rolls-Royce shares haven’t performed well in 2022, with the stock down more than a quarter. Here’s why the engineering giant is struggling!

| 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.

Rolls-Royce (LSE:RR) shares have lost 25% of their value over the past three months. The stock has been declining since late autumn and is down 32% over the past six months. At around 89p, Rolls-Royce is actually trading at a level comparable with its lowest point during the pandemic in 2020. It’s worth remembering that the aviation industry took a huge blow in early 2020, with very few passenger services going ahead as scheduled.

What’s behind the drop?

Aviation is the biggest market for Rolls-Royce and while 2022 is undoubtedly a better year for flying hours, its been bad for orders. The cancellation of 63 Airbus A330-900s is a major reason for this. The Airbus A330neo is a wide-body airliner and engines for the aircraft represent the bulk of Rolls-Royce’s order book. Following the cancellations, the A330neo backlog now only stands at 200 aircraft. This means that orders for Rolls-Royce’s Trent 7000 engines has been cut in half, down to around 400 from 859 at the beginning of the year.

This isn’t good news for a company that needed a bumper year. Flying hours were down by around 50% in the first half of 2020, causing massive damage to the firm’s revenue and leading it to take on more debt. Net debt increased by £1.6bn over the year to the end of 2021. This will put the business in a weaker place. Furthermore, the capacity to achieve future growth may be impacted by pandemic-induced cost-cutting. Cuts to investment and staff culls may have a negative impact on revenue in the future.

Mounting debt and a smaller order book have been compounded by broker concerns. JP Morgan has cast doubt on the profitability of one of Rolls-Royce’s new businesses — its small modular reactors (SMR) division. Nuclear energy doesn’t have a history of being overly profitable, but SMRs could be different. However, analysts aren’t too sure, with some suggesting this won’t be able to generate healthy margins or have a positive impact on the share price.

Tailwinds

2022 is looking like a better year for flying hours. And this is good as Rolls-Royce’s aviation business earns money through flying hours, not just the sale of individual engines and their components. It is not the value of the engines that is calculated, but the flight hours that can be achieved with the engine.

And while net debt climbed from £3.6bn in 2020 to £5.2bn at the end of 2021, Rolls-Royce doesn’t have any debt maturities to pay before 2024. This will give the business time to get back on a positive footing.

Should I buy?

I’m already a Rolls-Royce shareholder and I’d buy more at the current price as I’m confident the business will deliver improved results in the coming years. Naturally the debt is a concern and I’m also unsure about the profitability of its nuclear venture, but I don’t foresee any massive drop-off in the core aviation business.

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.

James Fox owns shares in Rolls-Royce. 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

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

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

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

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

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »