Over the past month, shares in Rolls-Royce (LSE: RR) have moved up around 18%. But the company continues to be a headache for many long-term investors. The Rolls-Royce share price remains 16% lower than a year ago.
As it still trades in penny stock territory, is now the moment to buy more Rolls-Royce shares for my portfolio?
Why is Rolls-Royce a penny share?
As it has moved up in the past several weeks, the Rolls-Royce share price has been edging closer towards the pound level. For now however, it remains a penny stock.
It was not always that way. In 2019, it traded above £2 per share and was sometimes higher than £3 per share. So the fall clearly reflects a big knock to investor confidence over the past few years.
The decline in civil aviation demand during the pandemic reminded investors of how vulnerable Rolls-Royce can be to demand swings. It also took some defensive steps at the time, such as shoring up liquidity by issuing new shares. That meant the proportion of the business represented by each share has been diluted, effectively driving the share price down.
But while it may make sense for Rolls-Royce shares to trade more cheaply than before, does that mean they ought to be penny shares? After all, the iconic business is profitable and generating free cash flow. On top of that, its large customer base and good reputation should help it generate revenues in future.
A potential bargain
Because of that, I think the Rolls-Royce share price continues to look like a potential bargain, compared to what I expect it to be several years down the line.
But why is it a “potential” bargain? For the share price to recover strongly from here, I think several things need to go right for the company. Civil aviation demand needs to get back to its pre-pandemic levels, or close, and stay there. The company also needs to prove the cost cuts it has made over the past several years can help its profitability without harming production timelines or quality.
But if the company continues to make good progress, I think that could be reflected in its share price. Even a recession might not be bad news for Rolls-Royce in the same way as for many other shares. Aircraft engines are often ordered years in advance and servicing is needed, regardless of the economic situation. So the share’s defensive qualities could help it attract more investor funds as the global economy slows down.
My move on the Rolls-Royce share price
As a long-term buy-and-hold investor, I see value in buying Rolls-Royce shares for my portfolio at the moment. The company has the potential to perform well in coming years, even in a recession, and I think that could be good for the share price.
That is why I would consider buying the engineer’s shares for my portfolio.
