Over the past few months, I’ve written several articles explaining why I believe the Rolls-Royce (LSE: RR) share price is cheap.
My analysis of the company is based on its own projections. Management believes the enterprise will become cash-flow-positive in the second half of this year. This may help reinforce the group’s balance sheet and underpin growth.
At the same time, the company has said it’s more than enough cash to weather the current uncertainty provided by coronavirus.
However, despite these optimistic management projections, the market still seems to be valuing the business as if it operated in a dangerous position.
The Rolls-Royce share price is changing hands at around 100p, which is roughly at the same level as it was at the end of 2020, despite the improved outlook.
And with this in mind, I’d invest £3k to buy the stock for my portfolio today.
Rolls-Royce share price on offer
Considering the uncertainties of investing in the aviation industry, Rolls might not be suitable for all investors. The company generates the bulk of revenues from selling aircraft engines. So investors and analysts tend to concentrate on the state of the global aviation industry when analysing its prospects.
This exposure is also behind the group’s significant drop in sales and profitability over the past 18 months. However, the outlook for the global aviation industry is improving rapidly.
For example, aircraft manufacturer Boeing sold 82 aircraft in February and logged 51 cancellations. This was the first time since November 2019 that monthly aircraft sales outpaced scrapped orders. While only a difference of 32 planes, it’s a start.
Further, according to a recent trading update, large-engine flying hours in January-April were around 40% of their 2019 level. In the third quarter of last year, this figure was around 29%.
These numbers indicate the outlook for the Rolls-Royce share price is steadily improving, although it could be some time before the group returns to 2019 levels of activity. As such, I view this as a long-term investment, and there are likely to be plenty of bumps along the way.
Turbulence en route
The company’s debt has increased markedly over the past 18 months, and it could be a long time before the aviation industry fully recovers. It may never fully recover. At this stage, it’s impossible to tell what that worst-case scenario would mean for Rolls.
So, while the company’s outlook is improving, I’m going to approach the business with caution. Due to this uncertainty, I’m not willing to invest a large sum in a business. That’s why I’ve settled on a figure of £3,000.
I think this will allow me to gain exposure to the stock while minimising downside risk. If Rolls starts to struggle again, the stock could fall back. Reduced exposure will limit my risk of losses.
Put simply, it seems to me as if the market is overlooking the potential of the Rolls-Royce share price. And I want to take advantage of that. It might not be smooth sailing over the next few years, but I think the company has strong recovery potential.
