Rolls-Royce shares are down a third — should I buy?

Rolls-Royce shares have fallen heavily in 2022 and now trade as a penny stock. Our writer explains how he is reacting.

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Since the beginning of 2022, it has been an unrewarding time to own shares in aircraft engine maker Rolls-Royce (LSE: RR). Its shares have fallen 34% so far this year and by 19% over the past 12 months. Is the market signalling that the company has troubles ahead? Or is this a buying opportunity for my portfolio?

Tough times

The latest fall is just one of a series of disappointments for Rolls-Royce shareholders over the past few years. The pandemic and government travel restrictions hurt flight demand badly in the past couple of years. That meant civil aircraft operators needed to service most of their engines less frequently, leading to lower revenues at Rolls-Royce.

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But there are signs the demand for civil aviation is getting closer to normal, but there are still risks ahead. Lockdowns are actually increasing in some markets at the moment, notably in Asia. On top of that, rampant inflation means some consumers have less spare money to put towards leisure travel.

And that isn’t the only concern for Rolls-Royce at the moment. Its efforts to move into less environmentally damaging engines could add capital expenditure costs for years to come. Cancellation of Airbus A330neo orders by some airlines could have a knock on effect on Rolls-Royce as its Trent 7000 engine powers the plane.

Investment case for Rolls-Royce shares

Although there are clouds on the horizon for Rolls-Royce, as an aircraft engine maker it certainly ought to know how to navigate stormy weather.

I think the recent fall in the price of Rolls-Royce shares may emphasise the company’s challenges without giving enough weight to its potential opportunities.

As one of the few established players in the massive aircraft manufacturing and servicing market, Rolls-Royce has the opportunity to make substantial revenues and profits in the future. It is also involved in areas such as power generation and defence, both of which I think could become even bigger markets in coming years.

The iconic brand, engineering expertise and industry reputation of Rolls-Royce will help it to win some of this business. On top of that, it should keep benefitting from recurring revenues, thanks to servicing engines it has already made. Some of those revenue streams could last for decades.

Why I’m buying its shares

I think the company’s long-term opportunity is not reflected in the current Rolls-Royce share price.

That is why I have been adding Rolls-Royce to my portfolio during its recent price fall. I think it may yet fall further, for example if demand for aviation falls. That does not have to be because of lockdowns as high fuel prices could have the same effect.

But in the long-term, I expect aviation demand to be strong and see it as one of the companies that can benefit from that. Rolls-Royces shares trading in pennies look like a buying opportunity for my portfolio – and I have seized it.

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Christopher Ruane 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.

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 considered, so you should consider taking independent financial advice.

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