Is the Rolls-Royce share price now too low to miss?

Andrew Woods discusses recent developments at one of his holdings and why he may buy more stock at the current Rolls-Royce share price.

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The Rolls-Royce (LSE:RR) share price has been extremely volatile lately. Having held shares in the company for some time, I’ve had to work hard to stay calm and remember that I bought them for the long term. They’ve fallen recently, so is now the time to buy more? Let’s take a closer look.

A few problems

In recent months, the share price movement has been overwhelmingly negative. In the past three months, the shares have fallen 12.5% and currently trade at 74p.

There are a few reasons for this. First, the broader stock market has endured a significant sell-off. This is mainly due to an economic climate of rising interest rates and rampant inflation.

Second, the company – a FTSE 100 jet engine and power systems manufacturer – is having to pay more for the raw materials it uses, like titanium. This could be a result of the war in Ukraine. 

Finally, there’s mounting concern over the firm’s debt pile, which currently stands at £7.04bn. This is made worse by the fact that it has a cash balance of only £2.39bn.

The business was hit hard by the pandemic because demand for new jet engines dried up. As a result, it was forced to reduce its workforce to make savings. Prior to the pandemic, the shares were trading for around 700p. Now they’re worth about 10% of that.

Although these issues are hard to dismiss, I’m of the opinion that the state of the company is beginning to improve.

Reasons for optimism

In the middle of this year, it completed the sale of its Spanish subsidiary ITP Aero. The proceeds from the transaction were around £1.57bn. This is vital for Rolls-Royce, because it will allow the firm to pay down some of its debt.

As a shareholder, I’m also pleased to see the business securing a number of contracts. Only recently, it concluded deals to build naval-based propulsion systems in Italy and Turkey. This will support revenue and, hopefully, lead to consistent profitability once again. 

In its defence segment, it continues to be a leader in the field. It works with air forces all over the world and has a long-term deal with the US military. 

Furthermore, it will construct missile propulsion systems for the UK and French armies, providing solid revenue over the coming years. Contracts like these will be essential for the share price to kick start its journey back to pre-pandemic highs. 

It’s quite clear that Rolls-Royce isn’t out of the woods yet. Debt remains an issue and the shares have continued to fall far below my entry levels.

Despite these problems, however, I’m beginning to see signs that results are improving. The business is getting leaner, and I think this could soon translate into a stronger balance sheet. Consequently, I’ll be increasing my holding in the coming weeks.

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.

Andrew Woods has positions in Rolls-Royce. 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.

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