The market crash has sent share prices spiralling. In the year-to-date, the FTSE 100 has lost 20% of its value. Rolls-Royce (LSE: RR) shares have had a more severe trajectory, dropping by 62% in the year-to-date. Are the shares worth snapping up at their bargain price, or are they now a dangerous value trap?
Battered Rolls-Royce share price
The coronavirus crisis has affected business in ways that previously wouldn’t have seemed imaginable. With travel restrictions and lockdown measures implemented around the world, the aviation industry has been hit particularly hard. This has caused a significant problem for Rolls-Royce, and especially its civil aerospace division.
In light of the coronavirus crisis, Rolls-Royce is reviewing options to strengthen its balance sheet. The company is taking action to slash its cash expenditure in 2020 and expects 9,000 job cuts across its global workforce of 52,000. It has announced 3,000 job cuts in the UK alone. Further to the job cuts it’s making, Rolls-Royce is looking to cut expenditure across plant and property.
Rolls-Royce hopes that the planned reorganisation will save the company more than £1.3bn a year and strengthen its balance sheet.
With these cuts being made, and as travel restrictions are eased and airlines are now preparing to fly, could it be worth buying into Rolls-Royce shares now?
In defence of Rolls-Royce
Like my Foolish friend, Roland Head, I feel that with the aviation industry struggling generally, growth in this sector probably won’t match previous levels any time soon. However, I remain hopeful that in the long term, as things turn back to normal, we’ll see the civil aerospace division recover. Of course, this is contingent on lockdown measures being eased further and consumer confidence returning.
I think the real gem for potential Rolls-Royce investors is the defence division of the business. Although the civil aerospace division is facing severe cuts, at this time, the cuts aren’t affecting the defence division. The company reports that this division has been robust during the pandemic and last year it reported a record-breaking performance of £5.3bn of new orders. In light of this, the firm has stated that the outlook for the defence division is unchanged for 2020.
I think the defence division is a key perk linked to owning Rolls-Royce shares. Being a major supplier to the UK and the US governments also gives the business a strong competitive edge against its rivals, I believe.
There is no doubt that the short term will be turbulent for those who hold these shares.
With the Rolls-Royce stock price falling by roughly 62%, the shares have a price-to-earnings ratio of just 16. In my view, this definitely makes it a bargain share.
A struggling aviation industry needs to get flying again before Rolls-Royce shares fully recover, I believe. But I feel its defence division makes this a robust business. For long-term investors, I think this is a stock well worth buying at today’s bargain price.
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T Sligo has no position in any of the shares mentioned. The Motley Fool UK has 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.