Rolls-Royce (LSE: RR) shares have taken to the skies lately, soaring 34% over the last six months. That’s from a low starting point though, and the stock remains a dreadful long-term investment.
I could have bought the stock during the 2007/08 financial crisis — when the global capitalist system itself seemed on the brink of collapse — and still be down on my investment today.
Of course, few predicted that a worldwide pandemic would decimate the global travel industry in 2020. But the fact remains that over any meaningful period, Rolls-Royce shares have lost investors’ money.
| Time period | Rolls-Royce share price performance |
| 1 year | -8% |
| 5 years | -62% |
| 10 years | -67% |
| 15 years | -29% |
Why I’ve not owned the stock
I’ve been close to investing in Rolls-Royce shares a couple of times before. The first occasion was a few years ago when I’d been digging into the unstoppable rise of global travel. Millions more Chinese citizens were taking long-haul flights each year to visit every corner of the earth.
I wanted to find ways to gain exposure to this growth without picking individual airline stocks. Rolls-Royce stock appeared like a bit of a no-brainer. It sells engines around the world then makes money thereafter by servicing this installed base. But the firm’s profits were incredibly lumpy, so I went with Boeing instead.
This investment subsequently turned into a nightmare, but that’s a story for another day. In hindsight, it turns out I should have invested in Airbus, a company Rolls-Royce supplies its Trent XWB engines to. That stock is up 134% in eight years!
Anyway, the second time was at the start of the pandemic in 2020 when the shares lost 63% in 12 weeks. I looked elsewhere because of the amount of debt the company would inevitably have to take on to survive.
Why I’m tempted to invest now
As of January this year, there’s a new Rolls-Royce CEO. And Tufan Erginbilgic hasn’t minced his words about what he perceives to be the company’s failings. He called the engineering firm a “burning platform” that must transform to survive.
He’s now set about this task, including reducing the company’s significant debt pile. Net debt stood at £5.1bn in mid-2022, and reducing this while re-investing for growth could prove to be a delicate balancing act. There’s risk here.
However, global air travel is recovering, particularly with China finally reopening its borders. Large engine flying hours were at 65% of 2019 levels in the four months to the end of October, the company announced.
Long term, the global civil aviation sector will surely expand. That should create more demand for Rolls-Royce’s engines, and result in rising servicing revenues.
Finally, after three years of heavy losses, the engine maker returned to earning money in fiscal 2021. Yes, it was only a post-tax profit of £120m on £11.2bn, but it’s a start. The company reports earnings tomorrow and I’ll be interested to see if there’s further improvement on the bottom line.
If there’s progress here, I may well invest in the stock. I think we could be at the very beginning of a massive, multi-year turnaround story at the engine maker. As a long-term investor, I wouldn’t want to miss out on that!
