It’s been a turbulent few years for Rolls-Royce (LSE: RR) shares. The business has struggled in recent times as we’ve lurched from crisis to crisis. The stock took a massive tumble as the Covid-19 pandemic hit. Since then, it hasn’t really recovered.
This is largely due to the current macroeconomic environment. Stocks from a variety of industries have found themselves struggling this year as inflation and the Russia-Ukraine conflict have seen investors lose confidence in the market. This year alone, Rolls-Royce stock is down nearly 40%.
However, at their current price, Rolls-Royce shares look cheap. So, should I be rushing to add the FTSE 100 firm to my portfolio?
Rolls-Royce positives
Well, there are a few tempting factors for me.
Firstly, the business is heavily reliant on a flourishing aviation sector because it sells and services engines. This is the reason it took such a hit during the pandemic. However, with international travel edging ever closer to pre-pandemic levels, this should hopefully provide a boost for the firm going forward.
Elsewhere, Rolls-Royce is also set to benefit from an increased focus on defence spending. Its defence division is its second-largest revenue generator. And as the conflict in Ukraine has seen many countries across Europe place a greater emphasis on security, Rolls-Royce has already an order backlog for over £1bn just from the first half of this year.
This heightened awareness includes the UK, where new prime minister Liz Truss recently pledged to increase the defence budget to 3% of GDP by 2030, equating to £27bn of spending.
The business has also streamlined in the last few years, including a restructuring programme. While the months ahead could be tough as the UK stares a recession in the face, the streamlining could help the firm navigate this. The first half of the year also saw a £1.1bn free cash flow improvement. These are all encouraging signs.
Debt concerns
The biggest issue I see with Rolls-Royce is its debt, which as of 30 June stood at £5.14bn. The recent sale of ITP Aero to private equity firm Bain Capital for £1.5bn will alleviate the strain this debt places on the business. However, it’s still of major concern to me. On top of this, rising interest rates will only mean the debt becoming a steeper challenge to overcome.
The business is also engaged in a dispute with its workers as they bargain for better pay. Its latest offer was a 6.5% basic pay increase backdated to from 1 March. However, like all its previous offers, it was rejected. As a result, Rolls-Royce workers are now set to vote on industrial action in the weeks ahead. Should strikes occur, this would be negative for for Rolls-Royce and its share price.
Should I buy?
The shares look cheap. However, I won’t be buying them today. A greater emphasis on defence spending should see the firm prosper. But I think it faces too many headwinds in the months ahead to justify buying the stock right now. While I see long-term value here, I’m placing the stock on my watchlist. If its falls further, I could be tempted to open a small position.
