Rolls-Royce (LSE:RR) rose 2% on Thursday morning but remains 20% down over the last year. In fact, the story is worse over the last six months, during which the shares have lost 38% of their value. At around 83p, Rolls-Royce is actually trading at a level comparable with its lowest point during the pandemic in 2020.
Rolls-Royce might be trading in pennies but it doesn’t have all the risks and issues normally associated with penny stocks. For one, there’s no huge difference between the prices an investor can buy and sell at.
Penny stocks, particularly at the lower end, tend to be smaller companies and are thinly traded. As a result, they can be swayed by larger trades. With a market-cap of just over £7bn, that won’t happen easily for Rolls-Royce.
So should I be buying Rolls-Royce for my portfolio?
Recent performance
2020 was turning point for this engineering giant, but not in a positive way. A sizeable part of the business is civil aviation however this was hit hard by the pandemic. Rolls-Royce’s aviation business earns money through flying hours/maintenance, not just the sale of engines and their components.
Flying hours fell by around 50% in the first half of 2020, causing substantial damage to the firm’s revenue. More worryingly for the future, it also led the company to take on more debt. Net debt rose from £3.6bn in 2020 to £5.2bn at the end of 2021. This may impact profitability in the years ahead.
Future prospects
Rolls-Royce’s capacity to reach previous levels of profitability may also be impacted by its pandemic-induced efficiency drive. The business went ahead with proposals to trim staff numbers and reduce capex. This may have a negative impact on the business’s long-term growth and future revenue.
The current order book doesn’t look great either. The cancellation of 63 Airbus A330-900 aircraft is a major reason for this. Engines for the wide-body jet represented the bulk of Rolls-Royce’s order book.
But Airbus’ backlog only stands at 200 A330s right now, meaning orders for Rolls-Royce’s Trent 7000 engines have been cut in half. Airbus will only require around 400 engines, down from 859 at the beginning of the year.
However, on a brighter note, Rolls-Royce is likely through the worst of the pandemic-induced disruption. We can assume that flying hours may return to pre-pandemic levels during the summer. Higher prices for aviation fuel may disrupt the recovery somewhat, but most airlines hedge fuel and there’s plenty of pent-up demand for travel.
Rolls-Royce management appears pretty optimistic too. The company said it was confident of “positive momentum in… financial performance in 2022, despite the challenges and risks around the pace of market recovery, global supply chain disruption and rising inflation”.
Should I buy?
I’ve already bought shares in Rolls-Royce and at this price I will buy more. Yes, there’s definitely concern about debt and the jury is out on where its small nuclear reactor will be a success, but I’m confident in the core business of this engineering giant.
