The Rolls-Royce (LSE:RR) share price crashed again, down 5% today at the time of writing this article. The engineering firm has had a difficult start to the year and has struggled to regain stability after the big pandemic crash. The Rolls-Royce share price is already down 29% this year, pummelled by news that CEO Warren East will step down in 2022. And last week, the company announced that Andreas Schell, president of Power Systems will also leave the company this year. Being the spearhead of Rolls-Royce’s promising Small Modular Reactor project, investors see this departure as a big blow.
But the company still remains an industry leader and has managed to show signs of recovery in 2021 after a huge restructuring. At 90p, is the company still a valuable investment for my portfolio despite recent turbulence?
Scheduled for lift-off?
Looking at the share price graph, it is hard to look at the pre-Covid highs of 300p and not feel optimistic about a rebound. During the pandemic, the engineering firm took many steps to cut down on costs, including letting go of over 9,000 employees, investing in smaller areas of the business, and reducing its reliance on civil aviation as the major source of revenue.
I wrote about the potential of the defence and renewable energy divisions of the company recently. The UK government has given the green light to Rolls-Royce’s nuclear reactor project and expects power from its plants to be a part of the country’s power grid by 2030. And the firm’s new electric plane recently clocked the fastest flight speeds for an electronic aircraft, a huge boost for the brand.
Rolls-Royce share price concerns
But, all these promising projects will take time and cost money to develop. And despite huge pre-orders, revenue from them will only start rolling after a couple of years. And the company has some lofty ambitions that I think will also be an expensive undertaking. The board is working on a net-zero emissions business by improving the efficiency of its flight technology and supply chain.
The company is developing a new UltraFan engine, which promises 25% more efficiency compared to early Trent engines. But all this involves an overhaul of the existing production line, which could put a lot of pressure on the already debt-ridden firm.
I think revenue from the defence wing’s £2.3bn order book will fund a lot of the R&D both in the developing power systems and improving airline engine efficiency. Although recent disposals will bring in £2bn, the firm’s net debt increased from £3.6bn to £5.1bn last year, driven by poor cash flow.
I think this poses a big risk for the Rolls-Royce share price. Investors look really reactive to news about the company, as displayed by the near 20% jump in March after news of a potential takeover. And the shares have fallen over 8% since the company announced the departure of Andreas Schell. If the next financial update by the company is unfavourable, we could see a mass sell-off.
And despite decent results last year, the Rolls-Royce share price looks set for a sluggish recovery. Despite trading at 90p today, I think there are better FTSE 100 shares that offer steady dividends and long-term growth prospects that I can look at for my portfolio instead.