Key points
- The company reported a £513m profit for the 2021 calendar year, increasing from a £1.97bn loss the previous year
- Rolls-Royce shares may be cheap at current levels when compared with two competitors
- The firm is building an increasingly sustainable business
The release by Rolls-Royce (LSE: RR) of its full-year results coincided with recent market volatility. Indeed, the shares tanked 13% in a single day. The announcement that CEO Warren East will depart the engineering firm at the end of 2022 and that revenue could potentially decline as a result of sanctioned Russian airlines, panicked investors. Looking at the underlying business, however, I’m more optimistic that a spare £1,000 would be well spent on this firm. I own shares in this company and I think now could be the time for me to add more at this bargain price. Let’s take a closer look.
Recent results and Rolls-Royce shares
Rolls-Royce recently posted its full-year results for the 2021 calendar year. As a current shareholder, I was pleased to see the business swing to a £513m profit, compared to a £1.97bn loss in 2020. This is indicative of a much improved operating environment. Indeed, cash outflow for the period declined massively, from £4.18bn to just £1.44bn. This is a sign that Rolls-Royce shares are stabilising.
Furthermore, the group sold off a number of businesses in 2021, like AirTanker Holdings and ITP Aero, which contributed to expected proceeds of around £2bn. This may go some way to paying down the company’s not insignificant debt pile of £7.88bn.
Why Rolls-Royce shares are cheap
By looking at the firm’s price-to-earnings (P/E) ratio, we are better able to understand if it is under- or overvalued. Rolls-Royce has a forward price-to-earnings ratio, based on forecast earnings, of 22.27. By comparing this with two major competitors, Safran and General Electric, that register 29.85 and 27.86 respectively, it is likely that Rolls-Royce shares are cheap. It is always worth remembering, however, that future pandemic variants could halt the company’s recovery.
Indeed, Deutsche Bank reiterated a price target of 130p. Furthermore, Berenberg issued a ‘buy’ rating this month with a target price of 160p. With shares currently trading at 101p, I think that the Rolls-Royce share price is going to climb even further.
Building a sustainable business
Recent efforts have focused on expansion into greener technologies. Only in December 2021, the Qatar Sovereign Wealth Fund invested £85m into the company’s plans for small modular reactors (SMRs). These will use nuclear energy to create power and should be added to the grid by 2030.
In November 2021, the firm was also testing electric aircraft in a bid to move the aviation sector to greener forms of power. These tests go hand-in-hand with tests of engines with 100% sustainable aviation fuel, which would be a major step in decarbonising the industry.
With recent results, I’m more convinced that Rolls-Royce shares are coming back. I will be using my spare £1,000 to add more without delay in an effort to increase exposure to exciting sustainability projects.