This week Rolls-Royce (LSE: RR) announced it would be cutting 9,000 jobs. Many will be lost in the UK. With the shares down 60% so far just this year, what’s next for the share price?
Share hit by the aerospace slowdown
The shares have been among the worst fallers on the FTSE 100 because of Rolls-Royce’s association with the troubled aviation industry. Less flying because of coronavirus means far less need for engine maintenance, which is where it makes its money. The company has also said aerospace demand may be reduced for years.
To be sure though, the engineer had problems prior to the virus and these issues are now being compounded. Biggest among these longer-standing issues involves problems with Trent 1000 engines. These issues have rumbled on and been very costly financially, and possibly reputationally as well. A fix was expected to be wrapped up next year. But with the coronavirus crisis, the resolution may be pushed back even further.
The company has been loss-making in three of the last four years, indicating management is grappling with some very big problems at the company. On that basis, even though the share price has fallen a long way quickly, I suspect it may have further to fall. I’ll be avoiding the shares, for a while at least.
Another hard-hit FTSE 100 share price
Another group with significant aerospace exposure is industrial turnaround specialist Melrose (LSE: MRO). Shares in the group have fallen from almost 250p in January to a little over 93p at Friday’s close. Overall, I think the main concern with this group is debt. Especially at a time when revenue is plummeting. Net debt is £3.28bn and the market capitalisation of the whole company is £4.5bn.
Debt has risen because of the acrimonious takeover of GKN. The ways to service that debt are also reduced. It’ll be harder to make profitable disposals in the current environment, which the group has been looking to do. Making more profit is an unrealistic prospect given how the first four months of the year went, with sales falling 20% versus 2019.
The actions management has taken are commendable, for example, suspending the dividend and cutting other costs. In the short term though, it’s unlikely to be enough to boost investor confidence.
This is why the shares may look cheap, on a P/E of seven, but I think they are only for the bravest of investors at this time. Historically the group has done well, but the near future looks very uncertain indeed. The group will have fewer issues to deal with than Rolls-Royce once a more normal environment does come back, but that’s about one of the only positives at the moment.
Right now it’s a tough time to be involved in the aerospace industry. To be clear, I think both will survive this market downturn, but I think they should only be seen as long-term investments. In the next few months, I believe the shares could well fall further.
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Andy Ross owns no share mentioned. The Motley Fool UK owns shares of Melrose. 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.