Down a third, is the Rolls-Royce share price now a bargain?

Christopher Ruane considers whether there is a buying opportunity for his portfolio because of the falling Rolls-Royce share price.

| 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.

Young woman wearing a headscarf on virtual call using headphones

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

sdf

I can now buy a little slice of Rolls-Royce (LSE: RR) for a third less than I could when the year began — that is because the share price has tumbled 33% so far in 2022. Over the past year, the engineer’s shares have fallen by 23%.

So, is this lower price a potential bargain for my portfolio?

Share price down, profits up

Although the stock has been moving down in the past few months, the business has been going in the other direction. Indeed, in its most recent trading statement in May, the firm said that it “continue(s) to expect positive momentum in our financial performance in 2022 despite the ongoing risks around macroeconomic uncertainties.“

Last year, revenue slipped slightly but the company moved to a £124m profit from a £3.1bn loss the year before. That profit is small but I still see it as a sign of improving business performance. The company also returned to positive free cash flow, reducing the risk it needs to boost liquidity by diluting shareholders like it did a couple of years ago. I also do not mind the revenue falling slightly. The company has been reshaping its business and selling assets. A leaner but more profitable business would be a positive development for Rolls-Royce shareholders in my view.

Is the Rolls-Royce share price a bargain?

Given the improving business momentum, why have the company’s shares been getting cheaper?

One concern is ongoing disruption in civil aviation. Along with mounting economic concerns globally, that could lead to fewer flying hours for civil aircraft. That could hurt revenues and profits at Rolls-Royce.

But I think some investors have also been worrying about the business fundamentals. Its profit last year translated to earnings per share of 1.5p. So even at its current reduced share price, Rolls-Royce continues to trade on a price-to-earnings (P/E) ratio close to 60. That looks very expensive and certainly not a bargain.

If earnings improve in coming years, the forward-looking P/E ratio would seem more attractive. But for this year, the firm has guided that it expects “operating profit margin to be broadly unchanged” and to generate “modestly positive free cash flow”. That sounds like slow progress in the effort to get back to the sorts of earnings seen at the company in its heyday.

Why I’d buy

But even if the share price is not a bargain, I still think it can offer me good value as a long-term investor.

The business has stripped out costs. If customer demand recovers fully in coming years, that should mean profit margins improve, helping boost earnings. I expect much higher profits than we saw last year, even if it takes several years to achieve them. On that basis, I think the current valuation looks attractive. That is why I would consider acting on the Rolls-Royce share price and boosting my position in the company.


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

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

With a 30% increase since the start of the year, does the Barclays share price still offer good value?

In light of an impressive Barclays share price rally, our writer considers the attractiveness of the bank’s stock relative to…

Read more »

British coins and bank notes scattered on a surface
Investing Articles

How much passive income could we earn from UK shares with just £10 per day?

Even with modest amounts of money to invest, we can still consider investing in the UK stock market to generate…

Read more »

Night Takeoff Of The American Space Shuttle
Investing Articles

3 booming growth shares in the Scottish Mortgage portfolio

Our writer highlights a diverse trio of red-hot shares from the portfolio of Scottish Mortgage Investment Trust. Are any worth…

Read more »

Businessman using pen drawing line for increasing arrow from 2024 to 2025
Investing Articles

2 growth stocks absolutely smashing the FTSE 100

If you think the wider FTSE 100 is having a good year (and it is), check out the gains holders…

Read more »

UK financial background: share prices and stock graph overlaid on an image of the Union Jack
Investing Articles

FTSE 100: next stop 10,000?

As the FTSE 100 briefly hits 9,000 points, investors are already looking forward to when the next 1,000-point level might…

Read more »

Investing Articles

Is Burberry ‘back’ as a solid update drives its shares to 17-month highs?

Burberry shares have risen by more than 60% since May's forecast-beating financials. Can the FTSE 250 luxury giant keep rising?

Read more »

Two gay men are walking through a Victorian shopping arcade
Investing Articles

The Burberry share price continues to rise despite falling sales!

Our writer looks at how the Burberry share price responded to the company’s first-quarter trading update, which was released earlier…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

What a crazy day for the share price of this FTSE 250 retailer!

Our writer’s taken time to digest the latest results of the FTSE 250’s Frasers Group. And he likes what he…

Read more »