The Rolls-Royce (LSE:RR) share price remains of considerable interest to me as a value investor. Brave buyers picking up the FTSE 100 stock in September 2020 would have seen a 165% return to date. So am I too late to the party? Is there more value to be had in buying the British aerospace and defence specialist in my ISA today?
Let’s take a look at the immediate future and what’s on the horizon for the storied British brand.
First up
Some really rather good news from the Derby manufacturer is that its engineers have started work building a demo version of the UltraFan. This is a £500m UK government-backed project to build the world’s largest jet engine that can run on sustainable fuels. The equipment is said to be 25% more efficient than Rolls-Royce’s Trent engines. These are the kind that power common aircraft like the Airbus A380 and the Boeing 787.
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Like the wider consumer switch from petrol to electric cars, there are expected to be refuelling and cost issues with sustainable fuels versus traditional jet fuel. But projects like the UltraFan could help aid the transition to more renewable fuel sources for the airline industry.
FTSE 100 businesses have had to overhaul their business models to become more environmentally-friendly and remain relevant. Low and zero-polluting products and services have become both a fundamental requirement and a massive business opportunity.
Rolls-Royce numbers
It’s hard to write about the Rolls-Royce share price and its potential future without considering its massive debt pile. The company’s October 2020 announcement that it would raise £2bn in debt accompanied a 60% share price crash in a single day.
Bosses have also said the business will burn through £4.2bn in cash in 2021.
And I couldn’t say the Rolls-Royce share price is exactly cheap, per se. Its price-to-earnings ratio is technically negative because it made a £2.91bn loss in the year to 31 December 2020. That’s more than double the £891m loss from 2019.
Looking to its future revenue potential, Rolls Royce’s defence arm did grow profits by 7.5% last year. The aerospace giant also does not expect civil aviation to return to 2019 levels until the 2024-25 financial year. And this division is by far its most significant earner, producing 41% of the business’s underlying revenue. But City brokers have pegged FY2022 as the point when Rolls-Royce returns to profit overall.
In conclusion
When I’m looking at potentially cheap FTSE 100 stocks that could offer me a great return I often lean on John Neff’s advice. “Buy stocks that look bad to less careful investors and hang on until their true value is recognised,” he famously said.
It might look pretty bad for the Rolls-Royce share price today, tomorrow, or next week. The debt is a risk. And the cash burn is a risk. But if I can buy and hold for a couple of years? The outlook could be much more positive.
The Rolls-Royce share price is treading water as we head into April 2021. In fact, it’s almost exactly where it was on the first day of trading at the start of the year. The business is unprofitable today. But I can see a future where Rolls-Royce returns to profit.
On that day, it’s quite possible the rest of the market will catch up and its true value will be recognised.
