Rolls-Royce (LSE:RR) is an engineering company that designs, manufactures, and sells aircraft engines, marine propulsion systems, and other components. Operating for over 100 years, it is one of the largest aerospace companies in the world.
Rolls-Royce shares have been on a wild ride in recent years. The company’s share price peaked in 2013 at over £10, but has since fallen considerably.
What happened to Rolls-Royce shares?
There are a number of factors that have contributed to the decline in Rolls-Royce shares in recent years. These include:
- The global economic slowdown: The global economic slowdown has led to a decline in air travel. In turn, this has led to a decline in demand for aircraft engines. As Rolls-Royce is a major supplier of aircraft engines, this has significantly affected the company’s revenue.
- The grounding of Boeing 737 MAX aircraft: In 2019, the US Federal Aviation Administration (FAA) grounded the Boeing 737 MAX aircraft after two fatal crashes. Rolls-Royce is a major supplier of engines for the Boeing 737 MAX, so this caused a great deal of uncertainty about future demand.
- The COVID-19 pandemic: The COVID-19 pandemic has had a devastating impact on the global economy, including the aerospace industry. The pandemic has led to a sharp decline in air travel, causing Rolls-Royce to lose even more revenue.
What are the positives?
- Strong track record of innovation: Rolls-Royce has a long history of innovation, and the company is constantly developing new products and technologies. This gives it a competitive advantage in the global aerospace industry. With orders for new aircraft now returning, there is potential for demand to soon reach pre-pandemic levels.
- Well-positioned to benefit from growth of the global aerospace industry: Following the end of the pandemic, the global aerospace industry is expected to grow in the coming years, and Rolls-Royce is well-positioned to benefit from this growth. The company has a strong portfolio of products and services, and it is also expanding into new markets.
- Potentially undervalued: The price-to-sales (P/S) ratio of 0.9 times is slightly below the average of the sector at 1.0 times, and discounted cash flow calculations suggest the shares may be 51% undervalued.
- Future growth forecasts: Rolls-Royce expects earnings growth of 58%, turning a profit over the next three years. This is considerably higher than the sector average of 25%.
- Strong balance sheet and healthy cash flow: A strong balance sheet gave the company the financial resources to invest in new products and technologies, even during the recent economic downturns. It is working hard to reduce debt levels, and anticipates free cash flow of close to £1bn in 2023.
Am I buying?
Overall, I believe that Rolls-Royce shares could be a good long-term investment. The company has a strong track record, and is well-positioned to benefit from the growth of the global aerospace industry. However, with such a rapid rise in the Rolls-Royce share price in 2023, I am waiting for a pullback from the current price before considering buying any shares.
