A FTSE100 part of suffering terribly since the Covid-19 broke out is that of Rolls Royce Holdings (LSE: RR). Rolls-Royce shares took a brutal beating during the spring 2020 market crash. In its darkest days, questions were raised about the company’s very existence. But following massive financial support from shareholders, bondholders and lenders, the famous British engineering firm rebounded.
Rolls-Royce shares roller coaster
After barely weathering the Covid-19 crisis in 2020/21, Rolls-Royce shares have rebounded in the past 12 months. At its 52-week high, the stock hit 150.48p on November 9, 2021, before crashing to a 52-week low of 77.87p on May 11. The share price has since recovered to 89.74p as I write late Monday.
Here’s how Rolls-Royce shares performed on seven different time frames:
|Year to date||-27.1%|
As you can see, Rolls-Royce shares have shown recent strength, up more than 9% in a week and almost 7% in a month. But over longer periods, the share price has suffered, losing more than seven-tenths of its value over the past five years. Whore.
At less than 90p, the Rolls-Royce share price is in penny-share territory today. Meanwhile, airlines are reporting big increases in demand for seats as Covid-19 fears recede. So is this beat stock a good deal today?
I see this stock as a binary bet
For Rolls-Royce shares to continue rising, the aerospace and defense company needs more positive news than negative.
On the one hand, investors are worried about galloping inflation (soaring consumer prices) and rising interest rates. Additionally, slowing economic growth could trigger another global recession, leading to a further decline in passenger numbers. And Russia continues to wage war on Ukraine, while China’s economic growth slows due to massive city-wide shutdowns. These are pretty heavy negatives for Rolls-Royce and its stock.
On the other hand, some things are looking up for the band. Its latest large jet engines dominate their field, thanks to a dominating market share. And these modern engines have many years of profitable use ahead of them. Similarly, following the Russian invasion of Ukraine on February 24, defense spending is skyrocketing – and the defense arm of Rolls-Royce made a profit of over £450million the year last. All of these positives could help support Rolls-Royce’s share price.
I don’t like Rolls-Royce’s debt burden
Brokers expect Rolls-Royce’s profits to rise from around £360m this year to over £680m in 2024. If that happens, shares would trade at around 11 times the earnings from 2024. But a lot could go wrong in the next two years. Meanwhile, at the current share price of 89.74p, Rolls-Royce shares are trading on a price-earnings ratio of nearly 61 and a miniscule yield of 1.6%. They also pay no dividends.
As a veteran value investor, Rolls-Royces shares don’t quite fit my bill, mainly because they’re a classic growth play. But I fear that the group’s enormous indebtedness will hold it back. At the current share price, the company is valued at almost £7.5 billion, but had net debt including leases of almost £5.2 billion at the end of 2021. to me, it may well dampen future performance, so I wouldn’t buy this stock at current levels.