The Motley Fool

The Rolls-Royce share price is down 66% in 2020. Is it a buy, or a value trap?

Image source: Getty Images.

Rolls-Royce (LSE: RR) on Thursday reported a pre-tax loss of £5.4bn for the first half of 2020, after the pandemic lockdown devastated the aviation industry. The Rolls-Royce share price lost 9% in early trading.

Chief executive Warren East said: “The Covid-19 pandemic has significantly affected our 2020 performance, with an unprecedented impact on the civil aviation sector with flights grounded across the world.”

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

That H1 loss is bad, but what’s most important right now is the company’s liquidity. I’m sure demand for Rolls-Royce’s products and services will recover, but it could take some time. And there’s a limit to the amount of cash the company can afford to lose in the meantime. It’s no wonder the Rolls-Royce share price has fallen 66% so far in 2020.

Balance sheet

This year’s crash has certainly hit Rolls-Royce’s balance sheet hard. From a position of net cash of £1.4bn at the end of 2019, the company has slumped to net debt of £1.7bn (excluding lease liabilities). That’s the kind of thing that happens when a company suffers a free cash outflow of £2.8bn. And there’s going to be more pain to come in the second half. Total free cash outflow of approximately £4bn is expected for the full year.

Despite that, the balance sheet seems safe for the moment, which should lend some short-term support to the Rolls-Royce share price. Total liquidity stands at £6.1bn, comprising £4.2bn cash plus loan facilities.

Restructuring, cost reduction and job losses are helping the firm weather the current storm, but there’s more needed. The company has identified a number of potential disposals that should generate more than £2bn. And East adds: “We are continuing to assess additional options to strengthen our balance sheet.

Rolls-Royce share price

The big question for investors: is the Rolls-Royce share price a buy now? I don’t have an easy answer.

I’ve been bullish on Rolls-Royce for a long time. It’s had its ups and downs, but I’ve considered it to be a well-managed business that should enjoy strong long-term demand. The firm’s involvement in the defence business also makes it (excuse the unavoidable pun) a defensive investment too. It’s one I’d generally consider to be resilient in the face of economic downturns.

But the current economic downturn is hitting its key markets very hard and killing the Rolls-Royce share price. Rolls doesn’t make money from selling engines, but from their long-term maintenance, repair and parts contracts. It’s a bit like the famous Gillette approach of selling razors cheap and making money on the blades. But that very model counts against the company in the current downturn, when planes just aren’t flying.

Recovery, but maybe not yet

I’m still convinced Rolls-Royce can provide solid long-term rewards for investors. But I can see more short-term pain coming its way — and more share price volatility — before things get better. It’s on my potential bargain buy list. But I’ll wait until I see some glimmers at the end of the tunnel. And particularly the decisions the company makes on how to raise more capital.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

Alan Oscroft 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.