The Rolls-Royce Holdings (LSE: RR) share price has toppled by more than a quarter in 2022. After starting the year’s trading above 126p per share it was last trading inside penny stock territory around 92p.
Rolls-Royce shares have tumbled as worries over soaring inflation and the global economy have ballooned. But some investors argue that now is a good time to buy the business as the commercial aviation sector gets back on its feet.
So what’s the verdict?
Unmissable value?
Rolls-Royce’ share price has risen strongly in more recent weeks. Yet on paper its stock still looks dirt-cheap.
City analysts think earnings will gallop to 1.48p per share in 2022 from 0.11p last year. This leaves the company trading on a forward price-to-earnings growth (PEG) ratio of 0.1.
This is well inside the benchmark of one that suggests a share is undervalued.
Commercial aviation rebounds
As a long-term investor, I’ve reconsidered whether I should buy Rolls-Royce shares myself. The global travel industry is tipped for solid growth in the coming decades. And aerospace engineers like Rolls-Royce will play an essential role in these forecasts being met.
Planebuilder Airbus for instance has estimated that commercial passenger numbers will grow at a compound annual growth rate of 3.6% in the 20 years to 2041.
Encouragingly the global aviation industry is getting back on its feet following the horrors caused by Covid-19. Trade association the Airports Council International thinks passenger volumes will “improve significantly” in 2022 and reach 77% of the levels seen three years ago.
The body forecasts that traffic will reach pre-pandemic levels in late 2023, too.
Could Rolls-Royce’s share price double?
At the start of 2020, Rolls-Royce’s share price was trading around 236p per share. That pre-pandemic price is up 157% from current levels, and a return to those levels could help me more than double my money if I invested today.
But there are a number of dangers to the airline industry rebound and, by extension, to hopes of a price recovery to those former levels.
Soaring inflation threats to stem the recovery in air travel as spending from holidaymakers and business travellers comes under pressure. Severe staff shortages at airlines and airports are causing masses of flight cancellations and could continue to do so.
Finally, an uptick in Covid-19 cases remains a constant threat as new variants of the virus emerge.
The verdict
These issues are particularly dangerous for Rolls-Royce given its debt-stricken balance sheet. The company needs the profits to keep flowing in so it can pay off its colossal £5.2bn net debt.
I’d like to buy Rolls-Royce to make money from long-term growth in civil aviation. But I’m afraid it still carries much more risk than I’m happy with. So I’d rather buy other UK shares to try and double my money with.