One FTSE 100 share to suffer terribly since Covid-19 erupted is that of Rolls-Royce Holdings (LSE: RR). Rolls-Royce shares took a brutal beating during spring 2020’s market meltdown. In its darkest days, questions were asked about the company’s very existence. But following massive financial support from shareholders, bondholders, and lenders, the famed British engineering firm bounced back.
Rolls-Royce shares ride a roller coaster
After barely making it through 2020/21’s Covid-19 crisis, Rolls-Royce shares have bounced around over the past 12 months. At its 52-week high, the stock hit 150.48p on 9 November 2021, before crashing to a 52-week low of 77.87p on 11 May. The share price has since recovered to 89.74p as I write late on Monday.
Here’s how Rolls-Royce shares have performed over seven different timescales:
| One day | 3.3% |
| Five days | 9.2% |
| One month | 6.6% |
| Year to date | -27.1% |
| Six months | -26.7% |
| One year | -17.6% |
| Five years | -70.7% |
As you can see, Rolls-Royce shares have shown recent strength, up over 9% in one 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. Blimey.
At under 90p, the Rolls-Royce share price is in penny-share territory today. Meanwhile, airlines are reporting big surges in demand for seats as Covid-19 fears recede. So is this beaten-down stock a bargain today?
I see this stock as a binary bet
For Rolls-Royce shares to keep rising, the aerospace and defence company needs more positive than negative news.
On one hand, investors are worried about red-hot inflation (soaring consumer prices) and rising interest rates. Also, slowing economic growth could trigger another global recession, causing yet another slump in passenger numbers. And Russia is still waging war in Ukraine, while China’s economic growth is slowing due to massive city-wide lockdowns. Those are some pretty heavy negatives for Rolls-Royce and its shares.
On the other hand, some things are looking up for the group. Its latest large jet engines dominate their field, thanks to commanding market share. And these modern engines have many years of profitable use ahead of them. Similarly, following the Russian invasion of Ukraine on 24 February, defence spending is skyrocketing — and Rolls-Royce’s defence arm made a profit of over £450m last year. All these positives could help to support the Rolls-Royce share price.
I don’t like Rolls-Royce’s debt burden
Brokers expect Rolls-Royce’s profit to leap from around £360m this year to over £680m in 2024. If this happens, the shares would trade on around 11 times 2024 earnings. But a lot could go wrong over the next two years. Meanwhile, at the current share price of 89.74p, Rolls-Royce shares trade on a trailing price-to-earnings ratio of almost 61 and a tiny earnings yield of 1.6%. They also don’t pay any dividend.
As a veteran value investor, Rolls-Royces shares don’t really fit my bill, mostly because they are a classic growth play. But I worry that the group’s huge debt pile will hold it back. At the current share price, the company is valued at almost £7.5bn, but had net debt including leases of nearly £5.2bn at end-2021. To me, this could well act as a drag on future performance, so I would not buy this stock at current levels.