August wasn’t exactly a great month for the financial markets. The FTSE 100 index declined (on average) by 4.5% compared to its July levels as global macroeconomic factors continued to create an environment of uncertainty. In line with the overall decline, the aerospace engineering giant Rolls Royce (LSE: RR) also saw a dip in share price during the month. However, its 11% decline was a far sharper fall than that of the overall index.
It has started recovering since, and at the time of writing it was at a level not seen since the first week of August. This brings me to the question – was the decline in its share price collateral damage from the overall market dip? And, is it otherwise a good investment for long-term investors?
Let’s find out.
Results are a mixed bag
The way I see it, there’s a tick mark for health in its headline financials. At the beginning of August, the company reported an increase in revenue and operating profit, in both underlying and reported terms. In fact, it’s worth highlighting that in reported terms, it swung into profits in the first half of 2019 after reporting a loss in the same period of 2018. Underlying profit also showed an impressive 32% increase from last year.
The fact that the company is confident of resolving issues with the Trent 1000, the engine that partly powers the Boeing 787 Dreamliner aircraft, is enough to give confidence that it is in fact on the road to recovery. Issues with the engine led to increased costs for the company, according to the report.
However, earnings per share is a negative number as the group reported a net loss due to higher tax payments. Cash flow was also negative, which the company says is a seasonal feature that will reverse itself later in the year. All in all, while the results were not altogether bad, investors were more concerned about the negatives, evident in the fact that the share price fell on the latest update.
Rating downgrade adds to challenges
Existing investor concern was further underlined when ratings agency Moody’s downgraded Rolls Royce’s debt rating, pointing to cash flow issues. Moody’s earlier stable outlook for the company is now negative, clearly indicating that not everyone’s convinced the company is ready to put its problems behind it. A reduced rating can affect a company’s ability to raise funds, which is not a good sign at a time when it’s running at a loss and has been on a rocky patch for some time.
Silver linings
I’m not entirely averse to the share though. Even with all its troubles, the fact remains that Rolls Royce is a large, well-known company in an industry with high barriers to entry. In other words, it’s not easily replaceable. Its share price has performed over the last decade, even if the more recent years are nothing to write home about. It’s not a share for the fainthearted right now, for sure, but I would make some investment in it for the long term.
