As a penny stock, is the Rolls-Royce share price now a ‘no-brainer’ buy?

The Rolls-Royce share price is now trading for 80p, so do improving results make this company a bargain buy?

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Key Points

  • The international travel industry is starting to recovery, which could be positive news for the Rolls-Royce civil aerospace segment
  • The company posted a £513m operating profit in 2021, increasing from a near £2bn operating loss in 2020
  • The firm is seeking to introducing Small Modular Reactors to increase energy derived from nuclear power

At 80p, the Rolls-Royce (LSE:RR) share price is in prime penny stock territory. However, prior to the pandemic it was trading at around 250p. I’ve bought shares in this company throughout the past two years, but is it now a ‘no-brainer’? Should I add to my current holding? Let’s take a closer look.

An improving operating environment

The company primarily engages in the manufacture of engines for civil and defence aircraft. When international travel ground to a halt, therefore, the Rolls-Royce share price plummeted. This is because the firm is paid by the flying hour by airlines using Rolls-Royce engines.

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With an increasing number of countries reopening their borders, however, the operating environment may be improving. Restrictions have gone in many European and South American countries, although many Asian countries still have strict entry requirements.

Airline conglomerate International Consolidated Airlines Group today announced that passenger capacity had risen to 65% of 2019 levels. This is good news for Rolls-Royce, as more planes in the sky should increase revenue in its civil aerospace segments.

As international travel ramps up again, I think the Rolls-Royce share price may move higher. 

Financial results

Financial results are also improving. The company posted a £513m operating profit in 2021. This was an increase from a nearly £2bn operating loss in 2020. 

What’s more, free cash outflow fell drastically from £4.18bn in 2020 to just £1.44bn in 2021. 

These results prompted CEO Warren East to say that the firm was confident “in our expectations for 2022” and “future growth” more generally. 

As a current shareholder, I was pleased with these results and firmly believe that the business could publish improved results as the year progresses.

Despite this, it should be noted that past performance is not necessarily indicative of future performance.

New innovations

Rolls-Royce also has an active ‘new markets’ segment, which incorporates its Small Modular Reactors (SMRs) and electric aircraft.

With its SMRs, the firm seeks to introduce new technology to maximise energy derived from nuclear power. They could be on the grid by 2030 and the UK government recently announced a £2bn package for the expansion of nuclear power more generally.

The electric aircraft, on the other hand, are an attempt to reduce carbon emissions within the aviation industry. Having broken two speed records, they may be a significant breakthrough in aviation.

Investment bank JP Morgan, however, stated in April that there is “no guarantee of good profits” from the new markets segment and lowered its Rolls-Royce share price target from 140p to 75p.

Overall, this company is starting to show signs of a recovery. In penny stock territory, I think it may be a bargain. If results continue on a positive trajectory, I think the Rolls-Royce share price could soon follow. I will be buying more shares soon.

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Andrew Woods owns shares in International Consolidated Airlines Group and Rolls-Royce. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. 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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