The Motley Fool

Would I buy Rolls-Royce shares at 100p?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Rolls-Royce's business aviation engine, the Pearl 700
Image source: Rolls-Royce plc

The Rolls-Royce (LSE:RR) share price slumped from 200p to around 100p during the coronavirus market crash in March 2020. The price of the blue-chip stock continued to fall all the way to 35p in October 2020, but has since recovered to around 100p at the time of writing.

Rolls-Royce did suffer during the pandemic as it is heavily exposed to the airline sector. It does not make much money on initial engine sales. But, it does make money from monitoring and servicing them. The more time planes spend flying, the better for Rolls-Royce. Since planes were grounded during the pandemic, it stands to reason that Rolls-Royce would take a financial hit. The company booked a net loss of £3.2bn for 2020 and did not pay a dividend.

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...

But, if the pandemic looks to be ending, and planes are flying, Rolls-Royce, and its share price, should be fine, right? I don’t think so. I think a lot of the commentary on Rolls-Royce is too short-sighted. Yes, the pandemic might have been the straw that broke the camel’s back, but Rolls-Royce and its shareholders have been struggling for years.

Rolls-Royce has been struggling for years

I think it would be a mistake to assume that once the pandemic is over, the Rolls-Royce share price will recover. Since the high of near 400p in January 2014, the Rolls-Royce share price has headed lower, albeit with periods of respite.

When I look at the company’s financial performance, its multi-year stock price slide is not surprising. Gross margins have contracted every year since 2015 and even turned negative in 2020. Operating margins have been negative since 2018. The company made a profit in 2015 and 2017 but posted losses in 2016, 2018, 2019, and 2020.

  2015 2016 2017 2018 2019 2020
Gross Margin 24% 20% 16% 8% 6% (1.78)%
Operating Margin 11% 0% 8% (5)% (4)% (17.72)%
Net Income Margin 1% (27)% 23% (15)% (8)% (26.80)%

Rolls-Royce has raised billions in equity and debt to shore up its balance sheet during the pandemic. This will dilute shareholder returns for years to come. There are also current and future restructuring charges for shareholders to contend with, as Rolls-Royce tries to turn things around, perhaps balanced by cash from asset and business sales.

Rolls-Royce share price

Rolls-Royce’s turnaround requires air travel to get back to normal as it gets about half its revenues from its commercial aviation business. Optimistic projections have passengers taking to the skies as normal as early as this year. Others think 2035. Whatever the case, Rolls-Royce’s Trent family engines power wide-body aircraft. Narrow-body aircraft that make shorter flights seem to be where the recovery will happen fastest.

Returning Rolls-Royce to its pre-pandemic state is not something I would be relishing as a shareholder. It needs to do more than that. Rolls-Royce is part of the consortium that won a £250m contract to develop the UK’s next-generation combat aircraft called Tempest. The company is leading a consortium hoping to build small modular nuclear reactors, which the current UK prime minister backs as part of his 10-point plan for a Green Industrial Revolution. Rolls-Royce’s UltraFan engines will power narrow-body aircraft, diversifying it away from wide-body planes.

But those new engines won’t be in service until 2030, and those reactors and the Tempest aircraft could take even longer to enter service. I see Roll-Royce shares as a speculative recovery play at this stage, which could take years to pay off. I think there are better shares for me to buy than Rolls-Royce, even at 100p.

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!

James J. McCombie 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

Renowned stock-picker Mark Rogers and his 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 click below to discover how you can take advantage of this.