The past 12 months have been brutal for owners of Rolls-Royce (LSE: RR) shares. Indeed, this FTSE 100 stock has been a disaster since Covid-19 sent global stock markets crashing in spring 2020. But after losing the majority of its peak valuation, could there be hidden value in Rolls-Royce stock?
The collapse of Rolls-Royce shares
Back in August 2018 — long before Covid-19 reared its ugly head — Rolls-Royce shares were flying high. On 3 August 2018, they closed a smidgen above 375p. As I write on Thursday afternoon, they stand at 75.53p. Thus, they have collapsed almost four-fifths (-79.9%) from August 2018’s high-water mark. Crikey.
Thanks to the damage wreaked by coronavirus, this popular stock has crashed hard. Here’s how it has performed over six different timescales:
| Five days | 4.8% |
| One month | 9.2% |
| Six months | -8.3% |
| 2022 YTD | -38.4% |
| One year | -43.6% |
| Five years | -77.2% |
Over the past half-decade, the stock of this great British engineering firm has crashed by more than three-quarters. Also, Rolls-Royce shares have lost almost two-fifths of their value in the past 12 months. Yet some analysts warn that things might get worse for the group before they get better.
Is Rolls-Royce heading for stormy weather?
Along with defence, a large slice of Rolls-Royce’s income comes from its Civil Aerospace arm. This has benefited from surging passenger miles flown as demand for foreign travel recovers. But European consumers are struggling with soaring inflation, sky-high energy and fuel bills, and rising interest rates. As consumer confidence plummets, I suspect that many millions of foreign holidays will be ditched due to the ongoing cost-of-living crisis.
Then again, innovative developments in other Rolls-Royce divisions might energise future revenues. For example, the company’s plans to build nuclear-powered small modular reactors (SMR) are gaining momentum. The group is also entering the market for hydrogen-fuelled engines, but these blue-sky projects will be years in the making.
I might have missed the boat to buy
At their 52-week low, Rolls-Royce shares plunged to an intra-day low of 64.44p on 28 September. They have since rebounded by more than 11p to their current level. This leaves me thinking that I may have missed my chance to get on board at a bargain-bin price. Then again, as a veteran value investor, I find it very difficult to put a firm price on Rolls-Royce stock.
Without any tangible profits, positive earnings, or dividends to work from, it’s very tricky to justify the company’s current market value of £6.3bn. What’s more, the firm carries over £5bn of net debt on its balance sheet — and global interest rates are taking off. Also, the company lost £1.6bn in the first half of 2022, with positive profits unlikely to arrive until well into 2023.
In short, in this increasingly turbulent global economy, Rolls-Royce shares are too risky for me, although I think they are by no means a dead duck. Hence, I’ll stick to what I know best — buying shares in quality businesses at modest prices for the long term!