I can buy Rolls-Royce shares for just pennies. Should I?

Rolls-Royce shares are now trading in penny stock territory. Our writer explains why he has been buying.

| 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.

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.

Buying a Rolls-Royce (LSE: RR) jet engine is a very expensive business. By contrast, investing in the engineering firm can be a much, much cheaper affair. With Rolls-Royce shares currently trading in penny territory, are they an attractive choice for my portfolio?

The Rolls-Royce investment case

Whatever the share price, I think the long-term prospects for revenues at Rolls-Royce are promising. I expect strong future demand for civil aviation, even though there may be some sudden falls along the way.

If that demand comes to pass, it could be good for Rolls-Royce revenues in a couple of ways. Customers may order new engines. But the firm’s large installed base of engines will also need to be serviced. As the original manufacturer, Rolls-Royce will be the service provider of choice in many cases.

I also see positive drivers for revenue outside of civil aviation. The company’s defence business saw underlying revenues increase 4.6% last year. A worsening security environment could lead governments to boost defence spending. That should also increase revenues at Rolls-Royce.

But what about profits? One of the historical challenges at Rolls-Royce has been converting revenues into earnings. In 2018, for example, revenues of £15.7bn produced a loss of £2.4bn. The company has taken steps in recent years to prune its cost base. That could help its profitability model. Last year, the company produced a small profit, its first in four years. It also returned to generating free cash flow. That helps liquidity.

Why are Rolls-Royce shares selling for pennies?

Despite an increasingly positive commercial outlook, there are still risks for Rolls-Royce shares.

While aviation demand is returning, airlines have been badly hurt by the lower passenger numbers of the past couple of years. That means they are likely to postpone engine orders, or drive a hard bargain. That could hurt Rolls-Royce’s profit margins.

In some cases, airlines have been cancelling orders for new planes, which could have a knock-on effect on engine orders. Meanwhile, aircraft engines are receiving increasing criticism for their environmental footprint.

A fair amount of that criticism comes from people who still fly for work and leisure so, for now at least, I see limited risks of serious action to change aircraft engines radically. But Rolls-Royce is proactively working on new engine technology that is less dependent on traditional jet fuel. That could help business down the line. In the next few years though, it is likely to add extra costs.

My move on the Rolls-Royce share price

Definitely there are ongoing risks to the Rolls-Royce share price. The company also badly burned shareholders with a heavily dilutive rights issue a couple of years ago. The risk of that happening again if aviation demand falls sharply may have put some investors off the company.

But are those risks so grave that they justify the 17% fall in the Rolls-Royce share price seen over the past year? I do not think so. The company’s business results have been improving and its long-term economics look attractive to me. I have a long-term perspective when investing, so that suits me fine.

So I have been happily buying Rolls-Royce shares for my portfolio.

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.

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.

More on Investing Articles

Investing Articles

Will it be too late to buy Nvidia stock in March?

NVIDIA stock is up more than 60% since the start of 2024. Our writer considers whether it might still be…

Read more »

Typical street lined with terraced houses and parked cars
Investing Articles

Why did Direct Line shares just soar 27%?

Direct Line shares have jumped more than a quarter in the course of today's trading session. Our writer explains why…

Read more »

Close-up of British bank notes
Investing Articles

These 2 shares are Dividend Aristocrats. Which should I buy this March?

Our writer likes the business model of this pair of FTSE 100 Dividend Aristocrats. So why would he only consider…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Investing Articles

I bought 49 Unilever shares in June. Here’s what they’re worth today

Harvey Jones bought a modest amount of Unilever shares last summer hoping the stock would soon recover. He's having to…

Read more »

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

I reckon these shares, potentially 20% undervalued, are Warren Buffett’s type of investment

Oliver Rodzianko thinks Games Workshop is an absolutely stellar investment. As it's potentially undervalued, he reckons Warren Buffett would agree.

Read more »

Calendar showing the date of 5th April on desk in a house
Investing Articles

Great investing habits that can boost my Stocks and Shares ISA

Forget complicated calculations and financial jargon! Our writer uses a few simple habits to build wealth inside his Stocks and…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Why has the St. James’s Place share price crashed 30%, after FY results?

The St. James's Place share price has just fallen off a cliff. What could have gone wrong in 2023 that's…

Read more »

Family in protective face masks in airport
Investing Articles

Here’s how much I’d have if I’d bought 1,000 Rolls-Royce shares 10 years ago

Rolls-Royce shares may be flying high this year but that wasn't always the case. I'm calculating how much I'd have…

Read more »