Trading for pennies, is the Rolls-Royce share price an unmissable bargain?

The Rolls-Royce share price has faced a difficult few years, and is currently under 100p. Is now the perfect time to buy?

| More on:
Middle-aged white man pulling an aggrieved face while looking at a screen

Image source: Getty Images

Rolls-Royce (LSE: RR) has suffered a particularly damaging price fall over the past few years. In fact, at the start of 2018, the Rolls-Royce share price stood at around 1,000p. However, with the company forced to raise significant amounts of debt and issue equity to stay afloat during the pandemic, it has since sunk over 90%, currently priced at under 90p. After this dramatic fall, should I be adding Rolls-Royce shares to my portfolio?

The Rolls-Royce share price has underperformed the FTSE 100 index over the past year, falling around 24%. By contrast, the Footsie has only declined around 1%. However, the group’s performance has improved in this time, meaning that its recent decline may have been unwarranted. 

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

For one, the aerospace giant managed to recover from a £3bn loss in 2021 with a £124m profit last year. This was the result of improved demand for travel and the effectiveness of the company’s restructuring programme. There were also significant contributions from its Defence business, which accounted for around 30% of the company’s revenues. 

The outlook for this year also seems fairly positive. For instance, in the first four months of the year, large engine long-term service agreement (LTSA) flying hours were 42% higher than the previous year. As Rolls-Royce is paid based on the number of hours flown with its engines, this should benefit its revenues.

The risks

Despite these positives, there are still several problems that could drive the share price down further. Firstly, at the end of 2021, the company had net debt of £5.1bn. As interest rates increase, this will become even more expensive to service, leading to further costs. Secondly, the company has negative shareholder equity, meaning that its liabilities are larger than its assets. This is a sign that the firm’s balance sheet is in desperate need of repair. It will also restrict its ability to pay dividends for the foreseeable future. 

In addition to balance sheet problems, the company is also involved in a pay dispute due to the increasing cost-of-living. This has resulted in Rolls-Royce offering a cash lump sum to many of its employees of £2,000, estimated to cost the group around £45m. Nonetheless, Unite, a trade union representing many of the employees has rejected this as insufficient, leading to the possibility of further pay rises. This would have an even greater damaging effect on profit margins. 

Is the Rolls-Royce share price too cheap to ignore? 

Using last year’s results, Rolls-Royce trades at a price-to-earnings ratio of around 60. From this valuation alone, it seems that the share price is not great value. However, the operating environment has certainly improved since last year, and the company expects positive cash flow during 2022. Therefore, I expect that this year’s profits may be far larger than last year. This is a view echoed by Morgan Stanley analysts, who recently described Rolls-Royce as “woefully mispriced”. I share this view and therefore, I am tempted to initiate a small Rolls-Royce position in my portfolio. 

Should you invest £1,000 in Rolls-Royce right now?

Before you consider Rolls-Royce, you’ll want to hear this.

Motley Fool UK's Director of Investing Mark Rogers has just revealed what he believes could be the 6 best shares for investors to buy right now… and Rolls-Royce wasn’t one of them.

The online investing service he’s run for nearly a decade, Motley Fool Share Advisor, has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 shares that are currently better buys.

All you need is an email address to get started

Stuart Blair has no position in any of the shares mentioned. 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.

More on Investing Articles

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

How I’d apply the Warren Buffett method to buying shares

Learning from billionaire investor Warren Buffett, our writer explains his own approach to investing in shares for his portfolio.

Read more »

pensive bearded business man sitting on chair looking out of the window
Investing Articles

This dividend share yields under 1% — but I’d still buy it

This dividend share has a low yield. So why would our writer consider adding it to his income portfolio?

Read more »

Young lady working from home office during coronavirus pandemic.
Investing Articles

Looking for a good share to buy? Here’s how I do it

Here are two approaches our writer uses when hunting for a good share to buy for his portfolio to aim…

Read more »

man in shirt using computer and smiling while working in the office
Investing Articles

One cheap FTSE 100 share I’d buy for a new bull market

This FTSE 100 share is unloved and starting to look seriously cheap, says Roland Head.

Read more »

Young brown woman delighted with what she sees on her screen
Investing Articles

How I’d invest £500 in UK shares in 2022

Investing a small amount of capital in UK shares can result in high commission costs. Zaven Boyrazian explains how to…

Read more »

Black woman using loudspeaker to be heard
Investing Articles

2 battered FTSE dividend stocks to buy in July!

I'm still searching the FTSE 100 for the best bargains to buy. I think these two big dividend shares are…

Read more »

Woman pulling baffled face
Investing Articles

Can I trust Lloyds’ 6.1% dividend yield?

The Lloyds' share price has sunk in 2022, causing the bank's dividend yield to leap. But can I really trust…

Read more »

Young mixed-race woman looking out of the window with a look of consternation on her face
Investing Articles

3 top stocks to buy before the market rebounds

Edward Sheldon highlights three beaten-up stocks he'd buy before global stock markets stage a recovery from their 2022 declines.

Read more »