It’s no secret that Rolls-Royce (LSE:RR) shares have taken a battering over the last couple of years. As a current shareholder, it’s not been easy to watch the share price fall. I’ve covered this stock a lot in the past, arguing that recent prices have been a bargain. I still think this is the case, so let’s take a closer look.
Looking deeper than price action
At the moment, the shares are trading for 74p. It may be difficult to believe, but before the pandemic, the share price was almost 10 times today’s level.
While the price isn’t everything, I firmly believe that the shares are well into bargain territory. But why have they been falling?
There are a couple of reasons. First, the firm’s large civil aerospace segment basically stopped when the pandemic hit. This was because demand for jet engines plummeted. Also, fewer planes were flying, which impacted Rolls-Royce’s revenue per flying hour. As a result, the company booked a pre-tax loss of £294m in 2021.
Demand for new engines still hasn’t fully recovered, but it’s coming back. Only last month, the business announced it was in discussions with jet manufacturer Airbus to provide engines for new widebody aircraft.
It’s news like this that makes me optimistic about the firm going forward.
Some reasons for optimism
For the six months to 30 June, revenue increased by 4% year on year, coming in at £5.3bn. Improvement in the civil aerospace segment, together with a solid pipeline of defence contracts, underpinned this increase.
However, underlying operating profit fell to £125m, more than 50% lower than the same period in 2021.
Some of this has been caused by very recent issues. The war in Ukraine, for instance, has increased the cost of raw materials like titanium. This eats into the company’s balance sheet.
Furthermore, the legacy of the pandemic and the related supply chain issues have caused delays in manufacturing and have prevented Rolls-Royce from operating at maximum capacity.
These trends have inevitably led to a downturn in the share price, but there may be more to this movement.
The shares have also been caught up in a wider market sell-off. This has mainly been the result of spiralling energy prices and the tightening of economic policy.
Central banks in the UK and US, for instance, have hinted that interest rates will rise even further. This has had a negative effect on the stock market.
The upshot of all this is that I feel these problems are temporary, or simply indicative of what’s going on in the broader stock market. With improving results, I think the business could hit clearer skies soon.
Overall, I’ve thought that the recent share price of Rolls-Royce has been very low. Having nearly hit the 70p level, I’m inclined to add to my sizeable holding to lower my average weighted price. I’ll be buying more shares soon.
