The Rolls-Royce (LSE: RR) share price has faced significant selling pressure this year. The coronavirus crisis has severely impacted the company’s outlook. As a result, investor sentiment towards the business has collapsed.
Unfortunately, it doesn’t look as if the outlook is going to improve any time soon. As such, I think it may be a good idea to ignore the Rolls-Royce share price for the foreseeable future.
Today, I’m going to explain why and highlight UK shares that might be a better option for long-term investors.
Rolls-Royce is one of the largest and most trusted jet engine manufacturers in the world. However, the group’s business model is based on service revenues. The company doesn’t make any money on the sale of each jet engine. Instead, it earns income on lucrative service contracts that extend for the life of the product.
These revenues are tied to flying hours. So, the more time an engine spends in the air, the more money the company earns.
The coronavirus crisis has hit the global aviation industry (and the Rolls-Royce share price) like a sledgehammer. Thousands of planes have been grounded, and many carriers have come close to collapse. Rolls has suffered because its engines are not in the sky, so they aren’t earning revenue.
Aviation analysts don’t expect the industry to return to 2019 levels of activity until at least the middle of this decade. Therefore, it looks as if it could be many years before Rolls’ sales and earnings start to recover.
With that being the case, I think it’s likely the Rolls-Royce share price will continue to languish at current levels in the medium term. City analysts are also speculating the business may need to raise additional funds from shareholders to reinforce its balance sheet. This is another reason why I think it may be better to avoid the stock.
Rolls-Royce share price alternatives
There are plenty of other alternatives on the market to Rolls. The coronavirus crisis is an enormous headache for this company, but other businesses have seen profits surge.
Some examples include health and safety equipment producer Halma. This company has benefited from the rising demand for personal protective equipment in 2020.
Even before the crisis, the firm had an impressive track record of growth. Over the past decade, management has pursued a buy-and-build strategy. The business has focused on acquiring smaller competitors, and integrating them into the wider group while, at the same time, reinvesting profits back into organic growth.
If management resumes in the years ahead, Halma has the potential to build on its successes this year.
Considering this potential, and the company’s growth track record, I think it has the potential to generate much higher total returns than the Rolls-Royce share price in the years ahead.
FTSE 100 peer Bunzl follows a similar strategy to Halma. The company has been using its size and scale to snap up smaller peers. It can then use its economies of scale to offer products and services at prices competitors can’t match.
Compared to Rolls-Royce, both Bunzl and Halma look to me to be superior long-term investments.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Halma. 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.