The Rolls-Royce (LSE: RR) share price dipped below 80p last week. As I write, the shares are only a few pence above that level. What lies behind the latest setback? And could we be looking at one of the last opportunities to buy the shares this cheaply?
When I heard that Rolls-Royce had offered its workers a £2,000 cost-of-living bonus to help cope with soaring inflation, I was up-beat. I saw it as a positive move, suggesting confidence at board level. So, surely, something to make everyone happy?
Not so fast
Well, actually, no. The Unite trade union thumbed its nose at it. To be fair, the lump sum was part of the company’s overall pay offer. And a union spokesperson said it “falls a long way short of the cost of living crisis claim submitted by our members“.
So, looming industrial relations problems on top of the company’s existing woes. That’s not exactly what the Rolls-Royce share price needs right now. But might it be extending some nice buying opportunities?
It doesn’t help that this comes on the back of other problems. Covid-19 travel restrictions are gone, and airlines can get back into the skies again. And the more miles they put on their Rolls-Royce engines, the more income Rolls gets from maintenance contacts.
Well, except that airlines and airports are in chaos. Staff shortages are everywhere. And every morning we awake to hear of further flight cancellations. Oh, and workers at Heathrow are planning strike action next month.
Bulging order book
It’s understandable if investors don’t look much beyond these current woes. But it would surely be a mistake to take our eyes off the longer term.
Forecasts suggest a couple of years of solid earnings growth for Rolls. It could be enough to drop the company’s price-to-earnings (P/E) ratio as low as 11 by 2024. That’s a headline measure and doesn’t take into account the company’s debt, though. But I’d hope to see Rolls making some meaningful inroads into that by 2024.
Why would I put any credence in these forecasts? It generally pays to be cautious of them. But in this case, Rolls-Royce has been reporting a strong order book build-up that puts some meat behind them.
In its most recent trading update, Rolls said: “Our strong order backlog gives us confidence on revenue, profit and cash conversion against the headwinds of inflation and supply chain risk“.
Debt is still the biggest threat, standing at £5.2bn at the end of last year. Still, that does include lease liabilities, which are really not the same as borrowings. Excluding leases, we’re looking at net debt of £3.4bn. While that’s still a heady figure, perhaps it’s only enough to make one eye water.
Year-end liquidity sounded good, with Rolls reporting a figure of £7.1bn. It included £2.6bn in cash. Overall, I think the long-term outlook for Rolls-Royce is looking reasonably healthy now.
I do suspect, however, that short-term pressures could cause the Rolls-Royce share price to price dip even lower this year.