The further Rolls-Royce (LSE: RR) shares fall, the more investors seem convinced they’re a bargain. The FTSE 100-listed aircraft engine maker is hugely popular. Yet those who took the plunge and bought its stock at various points in the last half decade will have been disappointed so far.
Rolls-Royce shares have crashed by 74.94% over five years, and by 31.53% over 12 months. They’re down 16.37% over six months too, largely missing out on the summer rally. Yet still investors continue to live in hope.
I get that. Investors love buying good companies at reduced prices, and Rolls-Royce fits that profile. Back in 2014, its shares traded above £4. Today, they’re on offer for 77p. But do they really offer me good value?
Rolls-Royce shares have fallen a long way
The Rolls-Royce share price isn’t the only thing that has fallen. Its revenues have dropped from £14.74bn in 2017 to £11.21bn in 2021. Over the same period, its pre-tax profits plunged from £3.9bn to a loss of £284m.
Outgoing chief executive Warren East has been punished by forces beyond his control since his appointment in July 2015. On his second day in the job, he was forced to deliver a profits warning for the group’s core aerospace propulsion business, amid troubles with its Trent 700 engines.
Maybe he shouldn’t have been surprised. That was Rolls-Royce’s fourth profits warning in less than two years. East also found himself apologising for a bribery scandal that predated his tenure, which triggered £671m in penalties. The Covid pandemic that hammered the global aviation industry wasn’t his fault either.
The market still admires him. Now investors are waiting to see whether new CEO Tufan Erginbilgic will be luckier than the last one
There are some positive signs, as the defence division now boasts a healthy £6.5bn order book. It should also benefit from rising geopolitical disorder, and concerns over China’s intentions towards Taiwan.
There’s no dividend but cash flow looks more positive
The civil aerospace division could see demand for its jet engines revive too as Covid fears subside and international travel picks up. However, the global recession and energy shock may dent business and consumer demand.
Management is fighting inflation and supply chain disruption by sharpening its focus on “pricing, productivity and costs”. It’s expecting low-to-mid-single-digit underlying revenue growth this year. Underlying operating profit margin should be broadly unchanged on last year’s 3.8%, with “modestly” positive free cash flow in 2022.
There’s no dividend though, and the stock is hard to value with a forward P/E of 94.8 times earnings (down from last year’s 697.4 times). Buying Rolls-Royce shares today is a leap in the dark. I’d buy them now, but with one proviso. I’d aim to hold for a minimum 10 to 15 years, to give enough time for the stock to recover from its serial setbacks and get growth and dividends back on track.
