Will the Rolls-Royce share price recover in 2022?

The Rolls-Royce share price is down 32% year-to-date. Here, this Fool assesses whether the stock can recover any time soon.

| 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.

Smartly dressed middle-aged black gentleman working at his desk

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.

Investors in Rolls-Royce (LSE: RR) will not be happy looking at its performance this year. The stock has tumbled 33% as ongoing market concerns have crushed sentiment. The Rolls-Royce share price has also been held back by the crippling effects the pandemic has had on the civil aviation sector.

Yet the stock is showing signs that it can make a recovery as we head into the second half of the year and beyond. But will this be enough for its share price to take off? Let’s explore.

Increased defence spending

Rolls-Royce is set to benefit from the increased focus placed on defence spending in recent times. Its defence division is its second-largest generator of revenue. And with a renewed focus, fuelled by the conflict in Ukraine, the business has already noted a backlog of orders. It generated around 30% (£3.3bn) of its revenues from its defence segment last year. With demand looking set to continue to rise, this could provide Rolls-Royce with a boost.

The firm has also made large strides to become more streamlined. It trimmed its costs by starting a restructuring programme back in 2020. And this would have played a part in the £124m profit the group reported last year. On top of this, it’s also generating free cash flows again. These are all positive signs.

Rolls-Royce debt

What may hinder Rolls-Royce’s recovery is its debt. At the end of 2021, the firm had a net debt of £5.1bn. The recent £1.5bn sale of subsidiary ITP Aero to private equity firm Bain Capital will go some way towards alleviating the pressure. However, as interest rates continue to rise, this debt may become harding to service, bumping up costs for the business. This could have a damaging impact on the Rolls-Royce share price.

The company is also embroiled in a pay dispute with employees amid the cost-of-living crisis. Rolls-Royce recently offered a £2,000 cash lump sum to around 70% of its UK workforce, at a cost of around £45m. But this was rejected by Unite, the union representing workers, which is holding out for an offer more in line with the rate of inflation. Should Rolls-Royce have to increase wages further, this would squeeze the company’s profit margins.

A further issue for me is its high price-to-earnings (P/E) ratio. It currently trades on a P/E of 58. I think this shows the share price is not great value.

Can it recover?

So, can the Rolls-Royce share price recover in 2022 and beyond?

Well, I’m not sure. Increased recognition of defence spending should provide the firm with a boost. However, I think the stock’s price could be dragged down by the headwinds it faces in the near term regarding its pay dispute. Its large debt is also a concern for me. While I like Rolls-Royce, I’m holding out to see if its share price slides further before opening a position in my portfolio.

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.

Charlie Keough 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.

More on Investing Articles

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »