Shares in Rolls-Royce (LSE: RR) have been getting a lot of attention recently. From 77p per share at the beginning of November, Rolls-Royce shares are up significantly within a month.
It is not hard to see why investors are filling their boots. People like a bargain and this FTSE 100 stock has certainly been hit by the global pandemic.
The question is should I buy Rolls-Royce in my Stock and Shares ISA? Let’s consider the investment case in detail.
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The victim
Rolls-Royce has been the victim of Coronavirus. In 2019 the company generated 51% of its revenues from the Civil Aerospace division. This includes the manufacturing and servicing of engines for the airline industry. Along came Coronavirus, which decimated tourism and the aviation industry, thus sending Rolls Royce shares into a free fall.
All is not lost, as there is now light at the end of the tunnel. Large pharmaceutical companies, such as AstraZeneca and Pfizer, have announced that their vaccines are delivering positive results. Any news of a potential Covid-19 vaccine is good for Rolls-Royce as it means tourism can bounce again. As a result, the airlines can operate and order new engines as well as service the existing ones from Rolls-Royce.
While I do not expect tourism and the airline industry to be fully operational any time soon, Rolls-Royce shares respond positively on any news of a Coronavirus vaccine.
Avoid bankruptcy
Rolls-Royce has implemented many measures to ensure that it can weather the Coronavirus storm. It has turned on the liquidity tap. Along with £2bn raised from a recent rights issue, it also has secured a £2bn loan. In addition, there is £4.2bn in cash and £1.9bn undrawn revolving credit facility.
Rolls-Royce is also restructuring its Civil Aerospace division. The company is making significant job cuts and has “identified a number of potential disposals”. This should ensure that Rolls-Royce’s largest revenue-generating division is in a leaner position going forward.
All these measures strengthens Rolls-Royce’s balance sheet. Investors can be comforted by the fact that Rolls-Royce is unlikely to go bankrupt in the short term.
Defence contracts
Rolls-Royce’s Defence division, which accounts for 20% of revenue, has been resilient during the global pandemic. The company can boast a multi-billion order book of defence contracts including with the UK and US governments. Investors should be happy with the stable revenue visibility from this division.
Over recent years Rolls-Royce’s profitability has been volatile, and the global pandemic has not helped. With a very large fixed cost base, Rolls-Royce expects to burn £4bn in cash by the end of 2020.
My verdict
I would buy Rolls-Royce in my ISA as the company is taking the right steps to weather the storm. While it will take time for Rolls-Royce to improve fundamentally, the shares rally on the back of a vaccine and the hope of returning to normality. I believe we are over the worse of Coronavirus, and now is a good time to add Rolls-Royce to my ISA portfolio.
