Recent results

The full-year figures for calendar year 2021 were just released by Rolls-Royce. As a present shareholder, I was glad to see the company turn in a £513m profit instead of a £1.97bn loss as in 2020. This indicates a significantly enhanced operational environment. Indeed, cash outflow for the period plummeted from £4.18bn to only £1.44bn. This is an indication that Rolls-Royce’s stock is levelling out.

In addition, in 2021 the company sold several enterprises, including AirTanker Holdings and ITP Aero, resulting in estimated revenues of roughly £2bn. This might help the corporation pay down its £7.88bn debt load.

Why are Rolls-Royce shares so cheap?

We can better grasp if a company is undervalued or overpriced by looking at its price-to-earnings (P/E) ratio. Based on expected profits, Rolls-Royce has a forward price-to-earnings ratio of 22.27. When compared to two key competitors, Safran and General Electric, which register 29.85 and 27.86, respectively, Rolls-Royce shares could be undervalued. 

Deutsche Bank‘s price estimate of 130p has been confirmed. And Berenberg also set a ‘buy’ rating with a target price of 160p this month. With the shares presently priced at 101p, I believe the Rolls-Royce stock price can continue to rise.

That said, it’s important to note, that subsequent pandemic variants might put a stop to the company’s comeback.

Sustainability at its core

Rolls has suffered a lot during the pandemic as airlines have stayed on the ground. But crucially, the firm’s focus for technological development and investment of late hasn’t been all about airline engines. It’s also been about fossil fuel energy alternatives — notably nuclear. The Qatar Sovereign Wealth Fund invested £85m in the company’s plans for Small Modular Reactors (SMRs) in December 2021. These will generate electricity using nuclear energy and should be connected to the grid by 2030.

And in its core air travel category, in November 2021, the company was also testing electric planes to help transition the aviation industry to cleaner energy sources. These studies were conducted in tandem with engine testing using 100% sustainable aviation fuel. This would be a significant step toward decarbonising the sector.

With recent results, I’m more hopeful that Rolls-Royce stock will recover and I’ll be adding more to my portfolio.

The post Is the Rolls-Royce share price seriously undervalued? appeared first on The Twelfth Magpie.

More reading

• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• Here’s how much I think Rolls-Royce shares will be worth by the end of 2027
• Could small modular reactors take Rolls-Royce shares to the next level?
• Is now the perfect time to buy Rolls-Royce, Babcock and BAE System shares?
• The SpaceX frenzy is over – is it time to look at Rolls-Royce shares again?

James Reynolds 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.

Solid fundamentals

Naked Wines saw a near parabolic rise over the course of the Covid-19 pandemic. By sheer chance it had gone through a period of serious restructuring, closing its stores and moving entirely online, which left it poised to take full advantage of our extended stay at home.

It has excellent profit margins on most of its products as well as exclusive access to the majority of the wines it sells. It also operates a partial subscription model which continues to bring in revenue even as sales slump.

In fact, while the words sales slump may be billboarded on most articles about it, sales still grew by 1% over the past six months. While this number isn’t anything to write home about, growth is growth and year on year, Naked Wines has actually grown 68% between now and 2020. Gross profit margins have increased from 38% to 40% in that same time.

Subscribers have also grown by 25%, meaning that Naked Wines is continuing to attract new customers even as the majority of people are choosing to spend their money out in bars.

Why the crash?

I believe that we are seeing a share price contraction only because the price rose too high too quickly. Investors tend to get excited when they see percentage growth in the double digits, but a company needs to maintain that growth to justify its share price. If results fall short of expectations, shares tend to fall.

This is exactly what we have seen today. No losses, no shrinking, just a failure to meet high expectations.

Winter outlook

Company management seem sure that the holiday season will bring sales back on track. Large family gatherings are, in my experience, best enjoyed with ample access to alcohol. And who knows, another lockdown may well trigger a boost in orders. Or the novelty of drinking in a bar may wear off if food and drink prices continue to rise.

But no one can be sure of what the future holds. It may be that as fuel and food prices rise, people choose to end their subscriptions or cut back on luxuries. If this happens, then the share price may continue to fall.

Is now the time to buy?

When I last wrote about Naked Wines, I said that I wanted to wait and see how an end to lockdowns would affect sales. I was right to steer clear then, but is now the time to add it to my portfolio?

Adding it is a risky move, but I think the fundamentals are all here.

This winter is make or break. If Naked Wines can, at the very least, hold onto its subscriber base, then I think this price correction will stabilise around the 500p mark. If it can increase its subscribers over the next six months, then I think we will see a more sustainable increase in the share price.

The post The Naked Wines share price has crashed, but I’m still bullish appeared first on The Twelfth Magpie.

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James Reynolds 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.

Key Details

Rolls-Royce is a world-famous aeronautics engineering company. Its shares trade at over 133p as I write this and the company has a very enviable price-to-earnings (P/E) ratio of 3.32. Its market cap is just over £11bn.

Rolls-Royce has struggled somewhat over recent years. The pandemic took its toll on the share price but gross profits had been on a downward trajectory since 2017. However, Rolls-Royce has gone on a partnership spree, bringing in billions in much-needed revenue that will pay dividends well into the future.

Partnerships and deals

Earlier this year, Rolls-Royce and the United States Air Force announced that they’d struck a potentially multibillion-dollar deal. Rolls-Royce will now refit and service a new line of engines for the US’s bomber fleet. The contract includes an initial $500m for six years of work but it’s open ended, meaning that the contract could be worth a total of $2.6bn (or £1.9bn).

In addition to that, Rolls-Royce has signed a $400m deal to refit Vietnam’s VietJet planes with new engines. Although not as flashy as a multibillion-dollar contract, this deal also includes ongoing service and maintenance of the aircraft.

Rolls-Royce also sold off its Spanish business ITP for an additional £1.5bn. Doing so has reduced operating costs while bringing in a single lump sum.

However, what I like most about the firm is how it chooses to reinvest its profits, rather than spend money on share buybacks or dividend payments. Just last week, the company opened an $11m naval facility in Massachusetts, which will repair, maintain and overhaul ships for the US navy on an ongoing basis. The facility will hopefully become a consistent revenue stream.

But the most important of these announcements was made the other day. Qatar will partner with Rolls-Royce to funnel billions of dollars into new, green energy start-ups within the UK. Details on this partnership are thin on the ground for now, but funding is expected to continue for more than 20 years, while employing Rolls-Royce’s expertise.

The deal has yet to be finalised, but as a contributor and partial owner of these new ventures, Rolls-Royce is positioning itself reap financial rewards for years to come.

Concerns

My biggest concern with has to be RR’s record of spotty profitability. Unlike tech stocks, which usually only need to employ a small number of software engineers, manufacturing is an expensive business. The firm must hire highly technical skilled workers, purchase enormous amounts of raw materials and rent large factories. Then it must ship heavy but delicate pieces of machinery all around the world. This puts it in a precarious position with a large number of overhead costs. If anything upsets that balance, revenue and profits tumble dramatically.

Investing in new industries is also risky. It could be years before the start-ups see profits, or are successful at all.

But, for me the potential upside outweighs the risks and I will be adding Rolls-Royce to my portfolio.,

The post The Rolls-Royce share price is a steal at £1.33. Here’s why appeared first on The Twelfth Magpie.

More reading

• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• Here’s how much I think Rolls-Royce shares will be worth by the end of 2027
• Could small modular reactors take Rolls-Royce shares to the next level?
• Is now the perfect time to buy Rolls-Royce, Babcock and BAE System shares?
• The SpaceX frenzy is over – is it time to look at Rolls-Royce shares again?

James Reynolds 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.

Does this mean I should add it to my portfolio?

Fundamentals

Tesco is a multinational grocery and retail chain and is the third-largest retailer in the world by gross revenue. Within the UK it is the largest of the ‘big four’ supermarket chains by market cap, with a 10% lead over the nearest competition.

Tesco’s total market cap is $20.94bn and its shares have a price-to-earnings ratio of 3.17. On top of that the company pays a modest dividend of 3.38% each year. These are all very solid fundamentals. Nothing exciting, like Tesla, but I could do far worse.

Tesco has a couple of strong business moats too. It has strong brand recognition and is considered good quality without being expensive. While economic ups and downs may impact revenue across the market, we all need to buy food every week.

So why are Tesco shares so cheap?

Price drops

Tesco shares fell along with the rest of the market in 2020 and then dropped again in February 2021. The second drop was prompted by the sale of Tesco’s business in Thailand and Malaysia. The resulting cash injection was used to pay a special dividend. This was nice for the shareholders, but by not choosing to re-invest that cash, Tesco essentially shrank its own business by $5bn.

That accounts for the recent drops, but why has the share price stayed so low?

I think that it’s because, while demand for groceries remained relatively stable, profits have decreased. In April 2021, Tesco announced revenue growth of 7% over 2020, but a 20% drop in profits. This could be due to a number of factors, like increased transportation costs or loan repayments. It could even be down to cash strapped customers choosing cheaper items with smaller profit margins.

Should I buy?

The real question is, of course, which of these factors weighs heaviest in my decision? Do I think the share price will go up or stay down?

The truth is that Tesco’s revenues have been falling since 2012. Those previously mentioned drops are nothing compared to the general downward trajectory of the share price. Tesco shares sold for 609p in 2007 and fell all the way to 305p before Covid. They currently trade for 272p each.

Transport costs are only going to go up because of the price of fuel. This is compounded within the UK by the complications brought on by Brexit. 

But I think I will add it to my portfolio. Tesco remains a solid business that pays its shareholders a reasonable dividend. Even with the recent drops, it has high revenue, and yearly profits in the billions. Tesco has shrunk its business outside of the UK but remains an international player.

As Covid restrictions end, the additional costs it incurred will also fall by the wayside, boosting profitability to pre-pandemic levels.

If it is able to increase its profitability in years to come, then the current share price looks like a steal.

The post The Tesco share price could be undervalued by 50% right now. appeared first on The Twelfth Magpie.

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James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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.

What is Darktrace?

Darktrace is a Cambridge-based cybersecurity firm that went public earlier this year. It specialises in protecting business data using advanced artificial intelligence technology to adapt and learn from the growing number of cyber threats coming from all around the world.

Tech companies like Darktrace have the potential to be extremely profitable. Often, they employ relatively small numbers of highly skilled workers to provide high-demand services to millions of people. This is part of why Facebook is worth so much.

Darktrace’s business model is subscription-based, unlike Facebook’s, but such a model is among the most reliable on the market. It locks in customers for long periods of time to services they become reliant on.

Why did the price rise so fast before?

Darktrace’s share price shot up after going public. It was first floated at 250p then climbed all the way to 985p. This is because the first half 2021 looked excellent for the company. It managed to bring in $281m in revenue for the period, an increase of 41.3%.

But this increase was mitigated somewhat by a sharply wider net loss of $149.6m due to non-cash finance costs. Darktrace claims that these losses ceased at the IPO, when all loan notes were converted to equity. 

Personally, I thought that most of the price action was driven by investor over-excitement. Everyone wants to be in on the next big thing in tech. Artificial intelligence are two words that have been thrown around a lot in tech circles for some time. We often hear about how AI and machine learning are already shaping our lives, but few of us fully understand what it is or how it works.

This was, initially, my main reason for staying away from Darktrace. I thought that we would see a price crash after early investors sold off their shares. It turns out I was wrong.

Should I buy the dip?

Darktrace has been an unusually volatile stock, both up and down. Even so, I’ll admit I was completely caught off guard by exactly how overvalued some analysts thought it was. One source put the share’s fair price at 330p!

Granted that’s just one analyst and it doesn’t mean the price will fall that low. In fact, Darktrace could well boom from here. But that 330p assessment is still a very far cry from the current price of 703p. I won’t be adding Darktrace to my portfolio.

The post I was right about the Darktrace share price. Is now the time to buy? appeared first on The Twelfth Magpie.

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James Reynolds 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.

The Cineworld (LSE: CINE) share price took a beating after the world was forced into lockdown by the Covid-19 pandemic. However, cinemas everywhere already faced a challenging future and the pandemic has accelerated trends that were already taking root.

Business challenges

Many of us are familiar with the cinema experience. We turn up, pay a bit too much for our tickets and consider buying some overpriced popcorn, then decide to sneak in some sweets from Tesco instead. Next we find our seats in the dark, sometimes overcrowded, auditorium, then somehow strain to see the picture on the enormous screen before us. I usually forget about these minor inconveniences and enjoy being sucked into an incredible story. But everything I have mentioned above represents a significant challenge to the profitability of cinemas around the world.

Popcorn prices are so high because cinemas have to share a third of ticket sales with the studios. This cut can be higher if the studio is large and the film is a highly anticipated ‘tentpole film’.

Big studios usually have contracts with cinema chains regarding how long a particular film is to be shown on large screens. This restricts a cinema’s ability to diversify its income with films from less demanding distributors. Not that it matters. Those smaller films usually go directly to streaming services, cutting out cinemas entirely.

Cineworld is the second largest cinema chain in the world, but that doesn’t mean it’s immune to these challenges.

The share price crashed after the company was only able to bring in $1.1bn in revenue in 2017. Then, despite bringing in $4.1bn in 2018 and $4.4bn in 2019, the stock traded sideways until crashing again at the start of the pandemic. Even when it was doing its best in late 2019, Cineworld was operating with only a 4% profit margin.

The company has more bargaining power than independent cinemas. But it’s still being squeezed between large American studios and the changing habits of filmgoers.

Pandemic changes

Customers were already more likely to stay at home than go to the cinema before the pandemic. This is in part due to the aforementioned high ticket prices, but streaming services are cutting deep into cinema sales. Streaming allows us to watch some amazing films without leaving our sofas and many television dramas are of equal or better quality than what is usually available at the cineplex.

One of the most significant decisions of the pandemic was Warner Bros choosing to release its large slate of tentpole films both in cinemas and on its streaming service (HBO Max) at the same time.

Releasing on an in-house streaming service makes a lot of sense for a studio. It cuts out ticket sharing with cinemas entirely and forms a new captive customer base that pays for a subscription every month.

Cineworld may be able to benefit from pent-up demand in the coming months. And we’ve already seen with the latest James Bond how keen consumers are to watch some movies in cinemas. But as we saw in 2018, even increasing revenues by nearly four times had a negligible effect on the share price.

Conclusion

Cineworld faces some serious challenges in the future. I don’t think this means cinemas will vanish. But I do think that adding Cineworld shares to my portfolio would be a very bad idea.

The post The Cineworld share price has more than Covid to contend with appeared first on The Twelfth Magpie.

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James Reynolds does not have a 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.

What is ‘Naked Wines’?

Naked Wines is an online retailer specialising in the sale of wines and spirits. Its stated goal is to provide quality wines at low prices by acting as a direct channel between independent winemakers and customers.

What makes Naked Wines unique is its ‘Angels’ system. Angels are customers who choose to pay a subscription fee of £20 each month. This money is then used by Naked Wines to help fund independent winemakers around the world. In return for this subscription, customers gain access to a slew of discounts, ranging from £2-£6 per bottle, as well as exclusive wines unavailable in stores or to non-Angel customers. The subscription fee can also be redeemed as credit when making purchases later on.

Not a bad deal if you ask me.

But with all of these cost cutting measures in place, I wondered if Naked Wines was able to make any money at all.

Revenue and profits

Before the pandemic, Naked Wines was struggling financially. In 2019, the company lost a staggering £9.4m, prompting it to sell off two of its subsidiaries and become a completely online business. This transition was completed in March 2020 and could not have happened at a better time.

Following international lockdowns, Naked Wines went on bring in £202.9m in revenue for the 2020 fiscal year, an increase of 13.7% over the previous. It seems people were very happy to buy wine online while they were furloughed at home.

This growth trend has continued through 2021. The company increased revenue by 68%. That’s £340.2m so far this year. I believe this leap can be attributed to expansion into the US market.

The number of Angels has also increased by 53%, which is good for long-term stability.

Reservations

If the company is able to maintain or expand its customer base, I think the share price still has a lot of room to grow. However, I am hesitant to add Naked Wines to my portfolio today for one reason. Economic uncertainty.

I’m reading a lot about the UK possibly entering into recession. If this turns out to be true, we may now see a long period where households are forced to cut unessential costs, such as their monthly wine subscription.

Naked Wine customers may well consider their Pinot Noir to be essential. As we have seen, sales of alcohol do often go up in challenging times. But for now I’d rather wait and see how the market plays out before I add Naked Wines shares to my portfolio.

The post The Naked Wines share price tripled in the pandemic. Can it surge higher? appeared first on The Twelfth Magpie.

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• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?

James Reynolds does not have a position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Naked Wines. 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.

Taiwan Semiconductors

TSMC was founded in Taiwan in 1984 and has been one of the leading suppliers of semiconductors ever since.

What are semiconductors? Well, they’re the main pieces of hardware that make computing possible. I won’t get into the details as they are far too complex for me to even understand, let alone write about. Suffice it to say that without semiconductors, you can’t make computers.

Given the ubiquity of computing devices, the TSMC share price has been on a steady rise since it first went public in 2006. It currently trades at ten times its initial cost.

Semiconductor shortage

The pandemic has caused a lot of problems for the world, but one which you may not have noticed was a worldwide shortage in semiconductors.

Semiconductors are difficult to manufacture and must be made under the strictest lab conditions. Even a single unwanted molecule can render a batch unfit for use. The entire process is incredibly expensive, sometimes taking years and requiring millions, even billions of dollars’ worth of specialized equipment and labour. 

Any disruption in the supply chain can set the whole process back by months and with economies on lockdown, it was nearly impossible to find the workforce needed to mine and extract the key minerals used in production. 

But demand for semiconductors has remained high throughout the pandemic and TSMC actually increased its revenue in 2020 by 50%. You can see this in the TSMC share price history. The company took a small hit at the start of the pandemic, but its share price then went on to almost double.

Even with reduced capacity, TSMC told investors that it expected to make $15.7bn in revenue in Q4 of this year. Production still remains stretched but the company is taking steps to meet demand, namely opening a new factory in Japan.

Japan factory and share price

While I was initially surprised by the decision to open a new factory in Japan, I have come to see the sense of it, and the subsequent jump in the TSMC share price.

This could be seen as a hedge against a more aggressive China. President Xi has recently talked openly about ‘reunifying’ Taiwan with the mainland. That could be behind TSMC’s decision to establish a base in another country.

However, I think the share price action has more to do with the choice by TSMC to reinvest its profits. Many companies, such as Shell or Apple, choose to use profits in expensive stock buybacks. Buybacks benefit shareholders in the short term, but prevent the company from expanding and adapting.

Reinvesting is the kind of action that benefits a company long term and opening a new factory shows TSMC’s commitment to the future.

Conclusion

Will I add TSMC shares to my portfolio? Yes, I think so.

I’ll be watching its price over the next few weeks in case there is a large sell-off, but I feel confident that TSMC is making the kind of decisions I want from a company I invest in.

The post What is happening with the TSMC share price? appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
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James Reynolds does not have a position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Taiwan Semiconductor Manufacturing. 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.