It seems that everywhere I look, people are talking about Rolls-Royce (LSE: RR) shares, and so I’m not surprised to see that it is one of the most popular traded companies in the UK right now.
Up until mid-March, the Rolls-Royce share price had soared by almost 25%. However, since then the company’s shares have almost given up those gains, falling more than 17% as of market close on March 24. Over the last 12 months, they are down by almost 25% at the time of writing.
However, I agree with my Foolish colleague Christopher Ruane that the Rolls-Royce share price will reach 150p this year, but following this dip, should I buy the stock for my portfolio today?
Why are Rolls-Royce shares falling?
Its share price began declining immediately following its full-year 2020 financial earnings release earlier this month, which revealed that:
- Total sales fell 24% to £11.8 billion.
- Total losses accrued to £4 billion.
- It suffered a £1.7 billion finance charge.
I wasn’t too surprised to see that things hadn’t gone very well for the aerospace company. After all, its biggest business segment, Civil Aerospace, took a nosedive thanks to Covid-19-induced travel restrictions. This is still a major risk for Rolls-Royce shares going forward, as there is no guarantee that life will return to normal any time soon (although these two top FTSE stocks that I’m buying before the summer will certainly be relying on such an event).
However, with major European markets such as Germany and France reporting rising coronavirus cases in the past month, there is a very real threat to Rolls-Royce’s share price if the situation should deteriorate.
Should I buy the stock?
I don’t think that Rolls-Royce shares will be able to stage a major comeback this year if lockdown restrictions and vaccination levels don’t go as currently planned, which is far from guaranteed, so I am under no illusions that I am taking a risk by adding it to my portfolio.
But I am going to take that risk anyway as Rolls-Royce’s share price continues to fall. Call me an optimist, but I’m still hopeful that widespread reopenings and some return to normalcy will return as 2021 drags on. And, at the end of the day, the company is still one of the world’s leading manufacturers and maintenance providers for aircraft engines — a job that I believe will be in high demand when reopenings come.
What excites me in relation to the Rolls-Royce share price is the amount of maintenance that will be required once more planes get back in the air. To put how important this maintenance revenue is for Rolls-Royce into perspective, the company sold £3.2 billion of civil aircraft engines in 2019 but recorded a further £4.9 billion in service revenues for the sector. Even in 2020, with Covid-19 severely limiting flights worldwide, service revenues came in at £2.8 billion.
Even taking away the fact that the company’s defense revenue actually grew by 4% to £3.4 billion last year, I expect the Rolls-Royce share price to grow even further when the thousands of currently grounded planes around the world suddenly need inspections before hitting the skies once more.
I think that Rolls-Royce shares are a bargain for my portfolio today. as I expect its share price to grow as normality returns.
Jamie Adams 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.