Rolls-Royce (LSE: RR) shares have been trading for less than £1 for most of 2022, sharply dipping when Russia invaded Ukraine in February. Are they worth buying while they’re still in penny share territory? And how long can it be before they break out and start heading up again?
Well, the Rolls-Royce share price took an unexpected tumble Thursday, after the release of first-half results. By the end of the day, the price had fallen 9%. Does that mean I was wrong to consider buying? Or does it just extend the opportunity to buy at a knock-down price?
After this latest share price setback, we’re looking at a 12-month fall of 20%. And 2022’s falls have pushed Rolls-Royce shares back down around their pandemic crash levels.
This comes despite the company reporting a record quarter’s order intake in its Power Systems division. And it flies in the face of a “£1.1bn free cash flow improvement due to commercial discipline and increased flying hours.”
So what gives? Underlying profit margins declined in the first half under inflationary pressure. And that won’t have pleased shareholders. Rolls does expect to see an improvement in the second half. But there’s surely more than just these results in play.
Those weakening margins didn’t help. But things became worse after the Bank of England (BoE) Monetary Policy Committee (MPC) held its latest meeting. After the MPC decided to lift interest rates to 1.75%, the Rolls-Royce share price decline accelerated.
It’s the biggest single base rate jump in 27 years, more than many of us had expected.
And there could be more to come. Governor Andrew Bailey stressed the BOE’s commitment to getting inflation down to 2%. The Bank also warned that the UK economy will fall into recession this year.
Rising interest rates can be tough for companies shouldering heavy debt burdens. And despite Rolls offloading assets and working to cut costs, net debt barely budged. By 30 June, it stood at £5,142m, only slightly down from December’s £5,157m figure.
Fears of industrial unrest could be darkening the horizon too. The Unite and GMB unions rejected the company’s earlier pay offer at the end of June. And they’re currently voting on a revised offer, with the result expected later in August.
Put together, these events do seem to be clouding the outlook. We’ve seen the Rolls-Royce share price pick up a few times over the past couple of years. But each time it’s fallen back, as signs of a recovery in the aviation business keep faltering.
The BoE now says the UK economy is likely to keep shrinking until the end of 2023. Does that mean Rolls-Royce shareholders will have even longer to wait?
Would I buy?
I find myself torn between a company I’ve always liked, and economic factors over which it has no control.
On the one hand, I can’t help seeing Rolls-Royce as an attractive long-term investment at today’s share price. But on the other, I suspect the shares could remain depressed for some time yet.
Meanwhile, I see plenty of lower-risk options for my investment cash.