The Rolls-Royce (LSE: RR) share price has had a turbulent time during the pandemic. The shares are priced at 128p as I write. This means they’re still considerably lower than almost 240p before the sell-off in March 2020.
The share price weakness extends much further back than the pandemic though. In fact, the last all-time high was at the start of 2014 when the share price reached 444p.
Does this mean the shares are now good value for my portfolio? Let’s take a closer look.
The bull case
The December trading update was positive in my view. The company said: “The gradual recovery in international flying combined with market recovery in Power Systems and resilience in Defence are driving improvements in our trading performance.”
Rolls-Royce’s biggest division is Civil Aerospace which relies heavily on the aviation sector. Therefore, the gradual recovery in international flying is important for the business’s prospects.
The company has also been restructuring of late. The trading update confirmed that this is being completed faster than expected, and there is now £1.3bn of cost savings anticipated for 2022. This is significant given that the market value of Rolls-Royce today is £10.7bn. I view this as a good sign, and it may mean the dividend will be reinstated soon.
City analysts are expecting earnings per share (EPS) to grow by a huge 97% in 2022, to 6.3p. This is impressive growth, but I do note that this is from a much lower base than years gone by. For example, EPS were over 22p the last time the Rolls-Royce share price was at its all-time high.
The bear case
The first major risk for Rolls-Royce is the ongoing pandemic. Countries are entering stricter lockdowns right now to curtail the spread of Omicron. This reduces demand for flying, and will therefore impact revenue generation from the key Civil Aerospace division. Any further strain of Covid may compound this risk further.
My main driver for buying a blue-chip stock like Rolls-Royce is the income generation. However, as it stands today, the company doesn’t pay a dividend due to its troubles in recent times. Highlighting the issues at the company, it generated a negative gross margin in 2020, which is highly unusual.
Should I buy at this price?
I view Rolls-Royce more favourably this year than I have previously. The company’s restructuring is running ahead of schedule, which should significantly help its cash flow. After the Civil Aerospace division was heavily disrupted due to the pandemic, there are now signs of improvement too.
But on balance, I’m going to wait a while longer before I buy the shares. There’s currently no dividend forecast for 2022. I also don’t expect enough increase in the share price for me to be interested as a growth investor. I expect the Rolls-Royce share price will tread water a little while longer until there’s more clarity on whether Covid will continue to disrupt the travel industry.