Despite a few firms seeing a rise in revenue following the outbreak of the coronavirus in Q1, it has been a tough period for the majority. This has been most noticeable in the aviation industry, where airlines have borne the brunt of the slide in travel demand. The knock-on impact has passed down to suppliers too, one of which is Rolls-Royce (LSE: RR). With the Rolls-Royce share price already down over 60% year-to-date, it lost 10% last Friday alone. What’s going on here?
Tough day? Tough year
The 10% drop on Friday was on the back of issues that had been brewing for a while. As a brief recap, one of the large revenue streams for Rolls is in the manufacture of aircraft engines. Indeed, it’s the second largest such manufacturer in the world. So although it’s not directly impacted by consumers not buying plane tickets, it’s felt the slump indirectly. This is because contracts for supplying new aircraft are being reduced. Fewer orders are flowing through meaning that Rolls has seen demand dry up too.
Undoubtedly, the past few months have been tough on its finances. This is one reason why the Rolls-Royce share price has continued to tumble after the market-wide March sell-off. On Friday, news reports surfaced claiming that Rolls was looking to issue new shares worth £1.5bn-£2bn in order to aid its finances. Reports also said the firm was considering selling Spanish subsidiary ITP Aero to raise cash.
What was more interesting was that Rolls came out later the same day replying to the articles. It said the firm was “reviewing potential options to strengthen our balance sheet”, but didn’t go into specifics. This confirmation that help may be needed saw the Rolls-Royce share price fall further, to close down 10% on the day.
The future of the Rolls-Royce share price
So what would I do right now? Quite simply, I wouldn’t buy it. I think the financing options could include a restructure, which would likely be taken badly by the market. You can see how investors took similar news from HSBC earlier this year. But as with HSBC, I do continue to believe that Rolls is a longer-term buy. Admitting that help is needed is the first stage to being able to take action and turn a business around.
Timing the market is almost impossible to do, and the same is true with an individual share price. But I do feel that more bad news is likely to come out from Rolls. So I’ll be patiently waiting on the sidelines for the next couple of months before looking to buy in. It’s true that the Rolls-Royce share price is at levels not seen since 2009, but to me that’s irrelevant right now. The crash of 2008/09 for the aviation sector is different to the crash of 2020. For Rolls, it’s not a fair comparison to buy it now just because it looks ‘cheap’.
As I’m being patient and waiting to buy in, I’m not going to be bored in the process. I’m excited right now about two pub stocks due to the reopening last weekend. You can read more about them right here.
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Jonathan Smith and The Motley Fool UK have no position in any of the shares mentioned. 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.