Rolls-Royce (LSE: RR) has had a tough first half of the year. With the stock down 36% year-to-date, this downward trajectory has been a familiar story for the Rolls-Royce share price in recent times. Five years ago, the shares were trading for over 300p. Yet, at the time of writing, the stock is currently sitting just above the 80p mark.
So, where will the Rolls-Royce share price go from here? And should I be buying the stock today?
Bull case
There are a variety of reasons that lead me to believe the Rolls-Royce share price could surge in the future. To start, the firm has taken great strides from the struggles it experienced due to the pandemic. For example, the FTSE 100 business turned a £124m profit last year. Given the £3bn loss it experienced in 2021, this is impressive. Should this recovery continue, I’d expect to see a hike in the Rolls-Royce share price.
It has also benefited from an increased emphasis on defence spending, as the firm has noted a backlog of orders. While this is unfortunately largely due to the war in Ukraine, spending has increased more broadly across Europe in recent times. Should these high levels of demand be seen in the future, this could contribute to higher profits for Rolls-Royce.
Bear case
However, there are also some alarming factors surrounding the firm.
One of these is the debt it has. This currently sits at around £5bn. And while this is a major issue in itself, as interest rates continue to increase this will only magnify the problem. This is because rising rates will make the debt more difficult to pay off. Going forward, this will provide problems for Rolls-Royce.
On top of this, the company is currently engaged in a wage dispute with its workers over the cost-of-living crisis. Unite, the labour union representing a large share of Rolls-Royce employees, rejected a £2,000 cash lump sum offered earlier this week. A Unite spokesperson said in response that “the revised offer still falls a long way short of the cost-of-living crisis claim submitted by our members and their expectations”. Should this dispute fail to be resolved soon, this will have negative implications for Rolls-Royce.
What also puts me off the stock is its high price-to-earnings (P/E) ratio. With a P/E of 54, I think this shows Rolls-Royce is overvalued. However, this figure could fall in the future should the firm continue to generate better profits.
What I’m doing
There’s no denying that Rolls-Royce has made strides since the pandemic. However, there are too many issues with the firm for me to deem it a buy for my portfolio. The large debt it has is worrying. And the pay dispute it’s currently involved in creates further pressure for the firm. Add this to its high valuation, and I see too many issues with the firm to add the shares to my portfolio. Despite the cheap Rolls-Royce share price, I won’t be buying the stock today.
