For much of the past five years, owning shares in Rolls-Royce Holdings (LSE: RR) has been a thoroughly unrewarding experience. But this FTSE 100 stock has rebounded strongly since the lows of 2020, when Covid-19 crashed global stock markets. That said, this popular share has tumbled hard over the past 10 months. So what’s gone wrong for this world-famous engineering giant?
Rolls-Royce shares ride a rollercoaster
I don’t own shares in Rolls-Royce and I never have. But perhaps its falling stock price is pushing this 118-year-old institution into bargain-bin territory? Here’s how the share price has fared over six different periods (based on the current share price of 81.7p and excluding cash dividends):
| Five days | -4.5% |
| One month | -11.2% |
| Six months | -28.8% |
| 2022 YTD | -33.5% |
| One year | -26.5% |
| Five years | -73.7% |
Alas, Rolls-Royce shares have fallen over all six time scales, losing over a third of their value this calendar year and crashing by almost three-quarters over five years. Of course, much of this damage can be attributed to the coronavirus collapsing air travel in 2020/21. And yet I’m surprised at how poorly this stock has performed over the past year, because I’d guessed it to be an ideal recovery play.
What’s gone wrong for Rolls-Royce?
At its 52-week high on 9 November 2021, the share price briefly hit 150.48p. By 11 May 2022, it had slumped to 77.87p, before rebounding to the current level of 81.7p. That’s more volatility than I liked to see in a FTSE 100 stock with a market value of nearly £6.9bn.
The problem with valuing Roll-Royce shares today is that there is little in terms of fundamentals to guide my way. The company is heavily loss-making, racking up a £1.75bn loss on turnover of £5.6bn in the first half of 2022. Also, net debt of around £5.1bn equates to nearly three-quarters (73.9%) of equity value.
Still, I can’t help thinking that Rolls-Royce has better years ahead of it, following the horrors of 2020/22. Although its operating margins have slumped to 2.4% (from 5.9% the year before), the group expects to be cash-flow positive for 2022 overall. Also, while long-haul travel is growing more slowly than predicted, the company’s civil aerospace division is recovering. Thus, the company forecasts earnings to recover to pre-pandemic levels by 2024.
Would I buy at these levels?
Although I expect Rolls-Royce to be on a firmer footing by 2024, I’m wary of its shares right now — despite their steep price fall. As a veteran value investor, I prefer to buy into businesses with strong profits, earnings, and cash flows, plus high cash dividends. Obviously, RR doesn’t fall into this category, so it’s not on my current watchlist.
But if Rolls-Royce’s civil aerospace, defence, and power-systems divisions continue to post improved results, then this could lead to a dramatic turnaround in the share price. This night mean great potential for capital growth for shareholders. In short, I would wager a modest punt on Rolls-Royce, buying shares while they trade below 82p. And then I’d cross my fingers and hope for brighter skies ahead!