Rolls-Royce shares just dropped 5%! Time to buy the dip?

This investor in Rolls-Royce shares looks at why the FTSE 100 stock lost altitude today and whether this might represent a buying opportunity.

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Rolls-Royce (LSE: RR) shares tumbled 5% to 450p after the market opened for trading today (25 June). This was notable because we’ve been used to the star FTSE 100 stock going the other way — skywards.

Is this 7% pullback from a high of 485p a good chance to nip in and add to my position? Let’s take a look.

Airbus bombshell

The reason Rolls-Royce fell today was because France’s Airbus issued a profit warning. The plane maker downgraded its forecast for full-year deliveries, citing a “degraded” operating environment and supply chain challenges.

As I write, Airbus stock is down 10% and on track for its worst day since March 2022. This has reverberated across the European aerospace and defence sector to which Rolls-Royce belongs.

Airbus uses Rolls-Royce engines on several of its popular aircraft models. On the guidance update call to analysts, Airbus management noted that engine makers are struggling with supply chain issues.

For the current quarter, it said: ‘We will have planes being produced without engines.” And that this was a “new issue that we were not expecting.”

Asked whether the UK firm was part of the problems, Airbus said: “Rolls-Royce is marginally part of the difficulties as we have supply issues with the Trent 7000 on the A330. But not on the A350 as far as I am aware of. So that’s why we are mainly focusing on the impact of delays of CFM and Pratt at the moment.”

CFM International and Pratt & Whitney are competitors to Rolls-Royce.

This does highlight supply chain risk

So, if Rolls-Royce is behind schedule delivering some engines, there might be operational difficulties going on that could impact its financial performance.

Moreover, Airbus CEO Guillaume Faury said engine makers will “have to face the consequences of those delays…They will be held accountable for what they did.”

Of course, we don’t know whether the company will have pay compensation or if these issues will impact its business at all. But I’m reassured that Rolls is only “marginally” part of the Airbus manufacturing problems.

However, this does explain why CEO Tufan Erginbilgic flagged “continued industry-wide supply chain challenges” in the firm’s trading update in May. And it reminds us that there are several factors outside of Rolls’ control that can throw a spanner in the works.

Should I buy the dip?

I don’t think this pullback is large enough to warrant me jumping in and buying more shares. To put it in context, the share price is now back where it was near the beginning of June.

The stock is still trading on a forward price-to-earnings (P/E) multiple of approximately 30. That’s not particularly cheap.

But would I invest today if I didn’t already own shares? I probably would consider doing so, yes. Large engine flying hours returned to 100% of pre-Covid levels in the first four months of 2024, and could head even higher in the second half.

Meanwhile, the company remains on track to deliver its medium-term (FY27) target of £2.5bn-£2.8bn in operating profit. And it now has ‘positive’ outlooks from all three major credit rating services.

Therefore, I’m more than happy to keep holding while I look for other opportunities. Speaking of which, Airbus stock might now be worthy of my attention…

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.

Ben McPoland has positions in Rolls-Royce Plc. The Motley Fool UK has recommended Rolls-Royce Plc. 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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