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Rolls-Royce stock’s problems in 5 charts

James J. McCombie — Sat, 10 Sep 2022 13:55:00 +0000

The Rolls-Royce (LSE: RR) stock price nosedived as the COVID-19 pandemic rattled markets in early 2020. Stock markets have staged a meaningful recovery since then. Rolls-Royce stock has not. Here’s why.

Flight times

Rolls-Royce makes aircraft engines. But, it doesn’t collect as much revenue from selling the engines as it does from servicing them. Take 2019, for example. Rolls-Royce took Â£8,107m in revenue from its civil aviation business. But, 60% of that came from after-market services. When the pandemic hit, aircraft stopped flying. When aircraft are not flying, their engines do not require much in the way of servicing. So, Rolls-Royce saw a significant chunk of revenue and, perhaps more importantly, steady cash flow evaporate when the pandemic hit.

^{Source: Rolls-Royce annual reports 2017 to 2021}

For the Rolls-Royce stock price to gain altitude, planes must start flying again, particularly wide-body ones. These fly long-haul routes and have large engines slung under their wings. Rolls-Royce leant heavily into the large engine market before the pandemic. That might have been a mistake, as long-haul air travel seems to have been pivoting to narrowbody aircraft even before the pandemic.

^{Source: Rolls-Royce 2019 annual report}

Planes are taking to the skies again. However, in line with other industry forecasts, Rolls-Royce does not see large engine passenger flying hours returning to pre-pandemic levels before 2024. Therefore, Rolls-Royce cannot expect its revenues to bounce back until then, either.

^{Source: Rolls-Royce civil aerospace investor day presentation, 13 May 2022}

Of course, Rolls-Royce does have other business segments. However, Civil Aviation is by far the largest. The ups and downs of the aviation business will likely continue to dominate the mood around the Rolls-Royce share price until at least 2024.

Debt and dilution will drag on the Rolls-Royce stock price

The drop in cash flow during the pandemic forced Rolls-Royce into emergency measures. It cut its dividend and significantly changed its balance sheet and business operations.

^{Source: Rolls-Royce annual reports for 2019 and 2021}

Rolls-Royce’s long-term debt almost doubled from Â£4,910m to Â£7,497m between 2019 and 2021. Without this debt raise, the company might not have survived. In addition, it sold new shares to raise funds in the form of equity. The common share count of the company rose from 5,627m to 8,368m over two years. To make matters worse, it sold the shares at knockdown prices as the Rolls-Royce’s stock price had collapsed. Despite all of this, the company’s cash position worsened significantly.

Rolls-Royce has raised some cash through asset sales of underperforming and non-core businesses. A restructuring effort seems to have started to improve its operating margin. Then there are forrays into green technologies to get excited about alongside that 2024 forecast for a return to form for Rolls-Royce’s biggest business.

But, shareholders old and new own a far smaller slice of Roll-Royce, and claim on its earnings, than they did in 2019. Until the balance is paid down, debt holders will collect lofty interest payments that could have been reinvested into the business or paid as dividends. I don’t think it’s over for Rolls-Royce, nor do I thinks its best days are behind it. But I do believe a Rolls-Royce stock price recovery will take years.

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James McCombie has positions in Rolls-Royce. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Should I snap up Rolls-Royce shares while they are still below £1?

Suraj Radhakrishnan — Mon, 05 Sep 2022 13:40:17 +0000

No company encapsulates the devastating impact of the pandemic on businesses as well as Rolls-Royce (LSE:RR). The absence of civil aviation for nearly two years wreaked havoc on the engineering firm. And its stock has been struggling since. But despite the decline, I think Rolls-Royce shares still hold incredible value.

While I am willing to overlook a few holes in its balance sheet, I also know that many strong businesses have collapsed during tough economic periods. Here, I will look at the Rolls-Royce share price in detail to judge if the business is worth investing in before 2023.

Can aviation boost Rolls-Royce shares?

Currently, the UK economy is under swirling clouds of uncertainty. The country is grappling with a huge energy crisis. In fact, reports show that the UK’s energy crisis is the worst in Western Europe. All of this has impacted how investors are looking at the market.

This also has put an immense strain on businesses, including Rolls-Royce. The firm’s return to profitability in 2021 was a positive marker for investors. However, this already seems to have slowed down over 50% in the first half (H1) of 2022 with just £125m in profits.

The silver lining here is the return of air traffic. Rolls-Royce has already seen a spate of deals for its profitable engine upkeep business. Just today, a new venture with Air China to overhaul and maintain its sizable fleet was signed.

While the latest crash in the Rolls-Royce share price is triggered by the health of the UK economy as a whole, the engineering firm is slowly looking to reverse recent fortunes.

Future focussed

The big reason why I am still slightly bullish on Rolls-Royce is because of the smart restructure. And the areas it’s exploring now have me buzzing.

Energy and defence are a huge focus for the firm going forward. The invasion of Ukraine has derailed the energy sector and has countries in the region scrambling to improve defences. This has boosted both industries tremendously.

And Rolls-Royce is set to play a big role in both. The firm’s small nuclear reactor project was given the green light by the UK government. The power systems division has seen its order book grow by 53% to £2.1bn. The second quarter (Q2) of 2022 especially saw a huge spike in sales.

The other booming area for Rolls-Royce is defence. The company recently signed billion-dollar deals with the US, UK and German militaries. It holds a vast £6.5bn order book, which includes an 11-year contract to support the Adour engine, which powers UK’s Hawk jets.

Concerns and verdict

Despite the large order books, profit margins have been falling. Its booming defence wing saw underlying profits fall 32% to £189m compared with H1 2021. The power systems also took a step back. H1 2021’s positive cash flow of £71m was reversed this year, with the sector bleeding out -£76m in H1 2022.

The board chalked this up to high demand, increasing costs and supply chain challenges. But I think these figures will get worse thanks to rising commodity prices.

There is no denying the intrinsic value of Rolls-Royce shares at 77p. But right now, given the turbulence in the UK, I am waiting for 2022’s full-year reports before investing in Rolls-Royce shares.

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Suraj Radhakrishnan has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Here are two beaten-down growth stocks I like the look of today

Dylan Hood — Tue, 30 Aug 2022 06:44:00 +0000

2022 has been a year characterised by surging inflation. Caused by supply bottlenecks from Covid-19, ultra-low interest rates, and magnified by the Russia-Ukraine crisis, inflation reached 10.1% in the UK in July. Across the Atlantic, the situation was similar, with prices rising 8.7% year on year in July.

With inflation rising, central banks are hiking interest rates. This is placing big pressure on growth stock valuations, as people pull their money out of speculative assets. At historically low prices, I’m looking for bargain growth stocks that could land me some big returns in the future. Below are two stocks I currently have my eye on.

NIO

NIO (NYSE: NIO) is a Chinese electric vehicle manufacturer. It had a standout year in 2020, when its shares climbed over 1,100%. However in 2022, things haven’t been as easy with the shares falling 40% year-to-date. Over 12 months, the shares are down 47%.

The reason I like the look of this stock is due to its remarkable results. In Q1, the firm saw its year-on-year deliveries rising by 29%, with revenues climbing by 24%. Although NIO is still loss-making, its losses shrank 10% compared with the previous quarter, which is a good sign. In 2021, revenues soared by over 122%!

NIO also boasts some market-leading tech when it comes to battery charging. Its cars feature unique battery swapping technology that can be applied in a matter of minutes. Being the only manufacturer to offer this service, I think the stock is well poised to capture market share.

Rolls-Royce

Rolls-Royce (LSE: RR) is a UK-based civil engineering and defence company. It was hit hard by the pandemic in March 2020 and recorded a hefty £4bn loss for that year. However, recently the firm reported a profit for the first time since then, signalling a strong recovery so far in 2022.

Rolls makes the majority of its money from servicing aeroplane engines. With global travel increasing, I think Rolls could be in a great spot for growth this year. In 2020, just 1.8bn travellers boarded planes. Fast forward to 2022, and it’s predicted that 3.5bn customers will board flights. This should help boost revenues so the group can keep delivering profits.

Rolls is also leading the stride in small-to-medium-sized nuclear reactor technology. It expects to receive clearance to roll out these reactors by 2024 and has already signed contracts with governments around the world to implement them.

The caveat

I think that both of these companies exhibit some great fundamentals. However, no matter how these firms perform over the coming year, rising inflation could continue to plague their stock prices. If this is the case, then they could fall even lower – regardless of their encouraging results. However, adopting a long-term view, I think these stocks could be great additions to my portfolio at their current prices.

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Dylan Hood has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

3 reasons why Rolls-Royce shares could be a big winner in 2023

Suraj Radhakrishnan — Tue, 16 Aug 2022 16:00:27 +0000

The steady decline of the Rolls-Royce share price over the last two years is well documented. The engineering firm’s shares have fallen over 70% since mid-2020 and 20.5% in the last 12 months of trading. But, things are finally looking up. Just this month, three crucial updates have firmly put Rolls-Royce shares on the radar of many investors, including me.

Here’s what I think these developments mean and why I think a resurgence is on the cards.

Significance of recent results

The first big factor that could affect Rolls-Royce’s shares is a return to profitability. And the recently released first-half (H1) results show improvements that strengthen my belief that a rebound is highly likely.

Free cash outflow for Rolls-Royce across H1 2022 went down by £1.1bn, predominantly due to increased flying hours in civil aviation. This shows me that Rolls-Royce shares benefit a lot if the aviation industry rebounds fully in 2023.

And I think this development could propel the firm to profitability in 2023. Boeing, a global leader in aviation, recently stated that the airline industry will reach 2019 levels by the end of 2023 or early 2024. In fact, April 2022 saw a 78.7% jump in traffic compared to the same period in 2021. And this trend has remained consistent across this year.

Debt has been a sore subject for the Rolls-Royce shareholders. But the approval of the €1.8bn sale of its ITP Aero business, announced last week, is the next big reason why I think Rolls-Royce shares could explode. The board announced that proceeds will be used to plug its £5bn debt, which could significantly bolster investor sentiments when full-year results are released.

Contracts galore

The final factor behind my bullish stance on Rolls-Royce are the deals signed this month. Malaysia Aviation Group is set to purchase 20 new Airbus A330neos, powered by the Rolls-Royce Trent 7000 engine.

The deal also includes a TotalCare agreement for its fleet. Engine servicing was a major cash cow for the firm before 2020 and I think this is could be the boost Rolls-Royce shares need.

The company also signed a huge contract with the UK government last week. Rolls-Royce’s MTU engine will now power the Boxer Mechanised Infantry Vehicle (MIV) for the British Armed Forces. The company is set to deliver 523 engines between 2022 and 2030 and will also play a big role in developing defence tech for the UK in the coming years.

Concerns and verdict

The board has stated that fluctuating commodity prices could impact the firm’s supply chain in 2023. In fact, Rolls-Royce’s operating margins dipped to 2.9% in H1 2022 from 5.9% in H1 2022. While this was predominantly because of a few one-time payments received last year, it also shows the impact of inflation on the business.

The group still expects single-digit underlying revenue growth this year. But this could underwhelm potential investors as there are FTSE 100 shares growing at a much faster rate right now.

However, Rolls-Royce is an established leader in the aviation space and has exciting projects in emerging areas. It operates closely with the UK government and is supporting the nation’s net-zero ambitions and also developing weapon tech. And if the above-mentioned trends continue as expected, the company could reach stability soon, making Rolls-Royce shares an FTSE 100 darling again.

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Director dealings: Rolls-Royce, Admiral, Dunelm

John Choong — Sat, 13 Aug 2022 07:00:00 +0000

Director dealings are essentially insider transactions for shares between directors and the companies they work for. These dealings are always made public, and are often considered a good indicator of a company’s future prospects. However, they don’t get nearly as much attention as other company news due to their complex nature. Nonetheless, here I’m breaking down this week’s biggest director dealings from three FTSE firms.

Rolls-Royce

Rolls-Royce (LSE: RR) is a British multinational aerospace and defence holdings company. It is one of the world’s largest makers of aircraft engines, and operates in four different segments. These include civil aerospace, power systems, defence, and new markets.

After a disappointing set of H1 results, Rolls-Royce shares saw yet another decline. But this week, a number of director dealings were carried out. Most notably, there was a huge purchase of shares from Chairwoman Anita Frew. The purchase from such a senior director should improve sentiment surrounding the stock.

Name: Anita Frew
Position of director: Chairwoman
Nature of transaction: Purchase of shares
Date of transaction: 5 August 2022
Amount bought: 50,000 @ Â£0.83
Total value: Â£41,300

Name: Lee Hsien Yang
Position of director: Non-Executive Director
Nature of transaction: Share purchase plan
Date of transaction: 8 August 2022
Amount bought: 1,161 @ Â£0.84
Total value: Â£980.23

Name: Wendy Mars
Position of director: Non-Executive Director
Nature of transaction: Share purchase plan
Date of transaction: 8 August 2022
Amount bought: 2,156 @ Â£0.84
Total value: Â£1,820.31

Name: Sarah Armstrong
Position of director: Chief People Officer
Nature of transaction: Share purchase plan
Date of transaction: 9 August 2022
Amount bought: 175 @ Â£0.86
Total value: Â£149.84

Name: Rob Watson
Position of director: President (Rolls-Royce Electrical)
Nature of transaction: Share purchase plan
Date of transaction: 9 August 2022
Amount bought: 175 @ Â£0.86
Total value: Â£149.84

Admiral

Admiral (LSE: ADM) is a British-based insurance company. It specialises in car insurance products, but also has a line of other offerings. These include home insurance, travel insurance, pet insurance, and van insurance.

The FTSE 100 firm released its H1 results earlier this week. Although profits slumped by almost half, the stock still shot up by 15% this week. This was most likely due to the announced special dividend of 15.8p. This would bring its total dividend to 60.0p per share. Investor sentiment was also further boosted when the Chairwoman purchased shares worth over Â£25,000.

Name: Annette Court
Position of director: Chairwoman
Nature of transaction: Share purchase plan
Date of transaction: 11 August 2022
Amount bought: 1,181 @ Â£22.44
Total value: Â£26,501.64

Dunelm

Dunelm (LSE: DNLM) is one of Britain’s biggest home furnishings retailers with an ever-growing market share. It operates over a 170 stores throughout the UK and offers over 50,000 products across a broad range of categories.

The FTSE 250 firm released its Q4 trading update not too long ago, and the interim numbers resonated well with investors. Nevertheless, its bottom line figure is yet to be released, and investors are wondering whether their expectations will be met. Therefore, the recent purchases by its CFO and another director could be an indicator of an earnings beat. The company is expected to report its official FY22 results in less than a month’s time.

Name: Vijay Talwar
Position of director: Non-Executive Director
Nature of transaction: Purchase of shares
Date of transaction: 4 August 2022
Amount bought: 9,670 @ Â£8.50
Total value: Â£82,156.32

Name: Karen Witts
Position of director: Chief Financial Officer
Nature of transaction: Purchase of shares
Date of transaction: 5 August 2022
Amount bought: 1,174 @ Â£8.45
Total value: Â£9,922.18

Types of shares

To provide context, there are a few types of shares that can be purchased by directors. Some directors opt to purchase shares via the open market. Having said that, directors also have the option to purchase shares via a share incentive plan (SIP).

A SIP is an employee plan for companies within the UK to flexibly award shares to employees. Publicly listed companies normally exercise this option because itâs tax-efficient for both the employer and its employees.

Types of Shares Within a SIP

In this week’s set of director dealings, a certain number of directors opted to purchase shares via their companies’ share purchase plans. This allows employees to purchase shares through automatic deductions from their pay. And this was the case with a number of Rolls-Royce directors, as well as Admiral’s Chairwoman.

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John Choong has positions in Dunelm Group. The Motley Fool UK has recommended Admiral Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

I think now is the time to buy this FTSE 100 growth stock!

Dylan Hood — Mon, 08 Aug 2022 11:34:23 +0000

Rolls-Royce (LSE: RR) shares have continued to struggle over the past few months, a trend the company has endured since the start of the pandemic. Year to date the stock is down 35% and over a longer 12-month span it’s down 24%. However, I think that at the current price of 83p, now could be a great time to buy the stock for long-term growth.

Positive developments

When Rolls-Royce announced its FY21 results, they showed the firm had returned to profit after making a loss in 2020. Coming in at a modest £10m, the profitability marked a steep recovery from the £4bn loss the year before. More recently, Rolls released its H1 2022 results, in which I also saw some positives. Although it reported a loss for the period, there was a record order intake for Power Systems and a £1.1bn free cash flow improvement. The company also announced that margins are expected to increase throughout the second half of 2022. This should help it deliver a profitable full year.

In addition to this, Rolls is making great progress in delivering on some of its key strategic targets. For example, the disposal of subsidiary ITP Aero has now received regulatory clearance and is expected to happen soon. This will help free up cash and ease the pressure of the £5bn debt on the company’s balance sheet. It has already delivered on promises to cut costs by £1.3bn in 2021. This was a pivotal move to help it recover from the pandemic.

There are also several other positive signs for the company. For example, its leading position in small-to-medium nuclear reactor technology. Rolls expects to receive approval for these in mid-2024 and has already received interest from various governments around the world.

Finally, flight numbers are steadily increasing, which is good news for a company that makes most of its money servicing jet engines. For example, large engine flying hours increased 42% in the first half of 2022 compared to 2021, which will help increase the firm’s top line.

Not out of the woods yet

It’s no secret that the macro economy is pitted against growth stocks at the moment. Inflation is reaching sky-high levels – a whopping 12.7% in June in the UK. This is being coupled with an increase in interest rates. As rates rise (as they did again last week in the UK and US) investors can earn a higher risk-free rate. This deters people from investing in speculative assets like growth stocks. Interest rates are expected to rise more throughout the rest of 2022 and beyond. This could inhibit the growth of Rolls’ shares.

Why I’m buying

At 83p, Rolls shares are the cheapest they’ve been for a while. There are macroeconomic considerations to take into account, of course. But taking a long-term view, I think the stock could deliver serious gains. It’s returning to profitability, with a number of exciting projects in the pipeline, so I’m looking at adding Rolls-Royce to my portfolio today.

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Dylan Hood and The Motley Fool UK have no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Are Rolls-Royce shares worth a buy in August?

John Choong — Mon, 01 Aug 2022 14:00:44 +0000

Rolls-Royce (LSE: RR) stock has lost a sizeable chunk of its value since the start of the year. Nonetheless, the share price staged a 9% recovery last month. As air travel continues to ramp up, Rolls-Royce shares could be worth a buy this August.

Wind’s blowing in the right direction

The FTSE 100 firm is set to report its half-year results in a couple of days (4th August 2022). So, this could be a buying opportunity for me, before the stock potentially rallies. Analysts in the UK donât always publish earnings estimates for quarterly or half-year periods. But the upcoming H1 earnings can serve as an indicator as to whether guidance laid out by management for the year can be achieved by the year end.

Metrics	Guidance & Consensus (FY22)	FY21
Underlying Earnings per Share (EPS)	1.50p	0.11p
Revenue Growth	3.5%	-4.4%
Operating Margin	3.8%	3.8%
Free Cash Flow	“Modestly positive”	-Â£1.44bn
Net Debt	Â£3.5bn	Â£6.1bn

Data source: Rolls-Royce Investor Relations

Given that Rolls-Royce earns a substantial amount of its revenue from servicing commercial aircraft engines, the return of global air travel towards pre-pandemic levels should do its top line an abundance of good. This has also been evident with the engine supplier tying up a number of TotalCare deals with airlines in July.

Data source: FlightRadar24

Additionally, the UK government is expecting to increase its defence budget to 3% of total GDP by 2030. The current budget sits at 2.25%. If this were to happen, Rolls-Royce could stand to benefit from a further stream of government contracts.

Data source: The World Bank

A valuable asset

Rolls-Royce also recently announced the successor to its current CEO, in Tufan Erginbilgic, who will be taking over in January. The appointment is a bit of a head-scratcher though, considering Erginbilgic’s lack of experience in the aerospace and defence field. He spent 20 years at BP, and served as its CEO for over five years.

Nevertheless, Erginbilgic is known for his creation of “significant value“. During his tenure at BP, he managed to quadruple profits, while holding a strong track record of execution and delivery. With plenty of exciting and unproven projects in the pipeline for Rolls-Royce, I’ll be hoping that he can help to deliver these new ventures. He will also have an incentive to improve the manufacturer’s profitability, as 30% of his Â£1.25m salary will be paid in Rolls-Royce shares. As such, I’m eager to see how he plans to navigate the company out of its mountain of debt.

Rolling in cash?

Speaking of debt, Rolls-Royce has a ton of it. That being said, if it manages to achieve positive free cash flow (FCF) by the end of the year, the British-based company may be well equipped to start paying off its debt in 2024. This would then give it the dry powder to fund its future projects.

Metrics (FY21)	Figures
Debt-to-Equity Ratio	-132%
Debt	Â£6.1bn
Cash and Equivalents	Â£2.6bn
Free Cash Flow	-Â£813m

Data source: Rolls-Royce FY21 Earnings Report

Taking everything into consideration, should I buy Rolls-Royce shares in August then? Well, it’s got plenty of exciting developments, and everything seems to be pointing in the right direction for the time being. This would normally entice me into investing. However, its financial position does leave me worried, as its earnings potential could be hindered by its debt repayments.

So, while I’m feeling rather upbeat about Rolls-Royce’s long-term future, I think there’s a possibility that its revenue and FCF could come in below expectations in H1 due to a slower than expected recovery in flying hours. For that reason, I’ll be putting Rolls-Royce on my watchlist for now.

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John Choong has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Should I buy more Rolls-Royce shares while they’re still under £1?

Andrew Woods — Sat, 30 Jul 2022 07:17:22 +0000

I’ve been steadily buying up Rolls-Royce (LSE:RR) shares over the past number of months. This FTSE 100 heavyweight has struggled since the beginning of the pandemic. However, things now seem a bit brighter. Is it time to snap up more of the shares while theyâre still under Â£1?

Turning things around

In the past year, the share price has fallen around 11%. In the last month, the shares are down 5%. At the time of writing, theyâre trading at 86p.

During the pandemic, when the vast majority of planes were grounded, there was a massive decline in demand for new jet engines. This had a heavy impact on the companyâs civil aerospace segment.

Due to international travel restrictions, the firmâs revenue also took a hit because itâs paid by the flying hour by airlines using Rolls-Royce engines.

However, in an update for the first four months of 2022, the business stated that civil aerospace flying hours were up over 40% year on year. It also expects underlying revenue to grow at a compounding annual growth rate of between 10% and 15%.

While there is the remote threat of further lockdowns, this is an indication that the airline and jet engines industries are starting to recover.Â

Despite this, many airlines have been forced to cancel flights in recent months due to staff shortages. Itâs always possible that this could have a detrimental impact on the companyâs revenue derived from engine flying hours.

With second-quarter results due soon, Iâll be watching very closely to see if there has been any further progress.

Busy defence and civil aerospace segments

In the past week, the business has partnered with easyJet to develop hydrogen combustion technology for use in jet engines. If successful, this could generate significant cash flow in the coming years.

Furthermore, Rolls-Royce is working with aircraft manufacturer Airbus to develop engines for new widebody aircraft, including the A350 and A380. This may bring more revenue within the civil aerospace sector.

The company also has a large backlog of defence contracts. This includes a lucrative engine replacement contract with the US Air Force for its B-52 programme.

Additionally, the business has signed a deal with French competitor Safran to work on a missile propulsion system for both the UK and French governments. While this may not be completed until the late 2020s, it may further strengthen Rolls-Royceâs balance sheet in the coming years.

Overall, my holding in the firm has mostly been in the red for the time Iâve held it. Nevertheless, consistent buying during market dips means that Iâm in a much better position than I otherwise would have been. To that end, Iâm not going to change my tactic, so Iâll add more shares soon while theyâre still trading for under Â£1.

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Andrew Woods owns shares in Rolls-Royce. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Up 9%, are Rolls-Royce shares finally changing course?

Suraj Radhakrishnan — Fri, 22 Jul 2022 14:10:53 +0000

In October 2020, the Rolls-Royce (LSE:RR) share price dropped to 38p. That was its lowest point in a decade, which highlights the incredible impact the pandemic had on the firm.

Since then, Rolls-Royce shares have struggled to break the 100p barrier. Share prices are down 28% in 2022 and 18% in the last six months. In fact, Rolls-Royce ranks 79th in the FTSE 100 index for returns in 2022.

But investors have seen some positive price action recently. In the last month, shares are up nearly 9%. And I think investor sentiment surrounding the company is finally trending in a positive direction. While these are the strongest signs of a turnaround in years, can the Rolls-Royce share price finally gain enough momentum to make a comeback? Let’s find out.

Last call before take off

With civil aviation still witnessing a laboured return to profitability, Rolls-Royce has used the downtime to overhaul its R&D. I think one of the most promising projects to come out of the engineering firm in recent times is the record-breaking hybrid electric aircraft.

With the renewable energy lobby getting stronger by the minute, electric engines are all the rage. And Rolls-Royce expects its all-electric passenger aircraft, in development with Norwegian firm Widerøe, to enter the market within a decade. This could overhaul the aviation industry and Rolls-Royce would be the chief architect.

Another big development today for the company is the long-term TotalCare servicing deal signed with Vietnamese airline VietJet for its fleet. This is the largest recent order for Rolls-Royce, which has faced huge losses without engine upkeep contracts. And I see this deal as a strong sign that civil aviation is getting back on track.

Growing order book and revenue

Rolls Royce’s thriving power systems and defence wings could be the lifeline it needed. Green energy has become a huge driving factor behind governmental grants and private investments. The latest proposal from the UK government expects a £400bn inflow into the sector within the next 5-10 years.

And Rolls-Royce’s small nuclear reactor project could have a big role to play. Last year, the firm received an order intake of £3.3bn, 24% higher than 2020.

Rolls-Royce’s defence order book has also grown considerably in the last six months. The company has a close partnership with UK’s air defence systems and is currently developing anti-missile tech and hypersonic missiles. This comes after the recent push to bolster defence systems across the world after Russia’s attack on Ukraine.

Yes, Rolls-Royce’s huge debt of £5.1bn is a concern. Also, while civil aviation is recovering, losses from two years of grounded planes could weigh on the company for a few years. Also, these recent R&D projects are not cheap. In fact, the company is spending in excess of £1bn a year on exploring new tech. While this is a reason why I am bullish on the company, it could also quickly turn sour for investors.

This brings me to why I am awaiting Rolls-Royce’s half-year results, scheduled for 4 August. Evidence of positive cash flow could trigger a recovery in this reactive market. But if the large order book doesn’t translate to cash-in-hand, Rolls-Royce shares will continue to struggle. I am watching the results carefully and would make an investment if they are favourable.

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Rolls-Royce shares are in hyper innovation mode! Should I buy?

John Choong — Wed, 20 Jul 2022 16:30:00 +0000

Rolls-Royce (LSE: RR) is most renowned for its civil aerospace division. However, its other businesses in defence and power systems also hold plenty of potential. With the company disclosing a flurry of new deals, partnerships, and innovations this week, I think Rolls-Royce shares are worth a closer look.

Innovations taking off

As defence spending ramps up worldwide in light of the Russia-Ukraine war, Rolls-Royce stands to be a beneficiary. The FTSE 100 firm unveiled a new Orpheus engine this week for its defence segment. The radical new engine can be used for low-cost, unmanned, small engine applications. Furthermore, its agile approach allows it to be built in half the time of a normal engine. This changes the way products and technologies are developed for the UK’s Future Combat Air Strategy (FCAS), and will help deliver the capabilities to fight and win in most hostile environments.

Additionally, Rolls-Royce announced a collaboration with the likes of the Royal Air Force, UK government, and Reaction Engines to develop hypersonic technologies. This is thought to be groundbreaking as the UK lags behind the likes of China, Russia, and the US in that space.

Nonetheless, the most exciting development for me this week was the announcement of the H2ZERO partnership with easyJet. The purpose of the programme is to pioneer the development of hydrogen combustion engines for aircraft by the mid-2030s. If successful, this could be revolutionary and do the Rolls-Royce share price wonders, as itâll have first mover advantage in the hydrogen fuel space.

Cutting edge technology

The exciting developments don’t just end there though. The manufacturer announced that it’s in the final build phase of its UltraFan programme, with tests set to start this year. The UltraFan is among the products Rolls-Royce has in its portfolio to encourage more sustainable air travel. It also boasts a suite of technologies that can be used in the group’s energy and power systems segments.

Source: Rolls-Royce UltraFan

Additionally, the power and flexibility provided by UltraFan gives it the potential to power both narrow and wide-body aircraft. Given that the former is a segment of the commercial market that Rolls-Royce has no exposure to, this would expand Rolls-Royce’s market share in the aero engine space.

Total care of money

Despite all the exciting news, however, it’s crucial to note that the company can’t fund these projects if it doesn’t shore up its balance sheet. As such, Rolls-Royce will have to ensure two things. The first is to wrap up its ITP Aero sale, worth Â£1.5bn. The second would be to have free cash flow as soon as possible. If this can be achieved, the engine supplier should be able to start paying down its debt by 2024.

Metrics (FY21)	Figures
Debt-to-Equity Ratio	-132%
Debt	Â£6.1bn
Cash and Equivalents	Â£2.6bn
Free Cash Flow	-Â£813m

Source: Rolls-Royce FY21 Earnings Report

Nevertheless, strong tailwinds from the travel industry should help with free cash flow, while three TotalCare deals struck with flypop, Norse Atlantic, and ITA Airways should serve as further catalysts. The deals bring an additional 50 Rolls-Royce engines to the servicing line.

With all that in mind, will I buy Rolls-Royce shares? Well, this week’s developments are certainly enticing. However, I’m still wary about the company’s financials. So, until these show a concrete improvement, I won’t be buying the shares. Instead, I’ll be keeping it on my watchlist for now, and cheering on from the sides.

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John Choong has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.