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At 80p, are Rolls-Royce shares a bargain stock to buy right now?

Rupert Hargreaves
·3-min read
Cute dog in funny colourful jester cap.
Cute dog in funny colourful jester cap.

Rolls-Royce (LSE: RR) shares look cheap after recent declines, compared to their trading history. What’s more, in my opinion, following the company’s recent fundraising, it’s now in a strong position to stage a recovery in the years ahead.

The group has raised £5bn from investors to strengthen its balance sheet. Management has also set out a cost-cutting plan to improve profitability. This will result in an annual pre-tax cash saving of at least £1.3bn by the end of 2022, according to the firm.

However, Rolls-Royce is not out of the woods just yet. Predictions suggest the global aviation industry is not expected to return to 2019 levels of activity until the middle of this decade. That implies that the group is in for several more years of instability.

As such, it seems as if this is an investment that’s only suitable for the most risk-tolerant investors. Indeed, in the short term, the company could continue to suffer from depressed investor sentiment. This could hold back Rolls-Royce shares.

Time to buy Rolls-Royce shares?

Whenever I’m looking at a business I always first try to understand what it does. When it comes to Rolls-Royce, the firm’s business model is a little difficult to understand. The group has a number of divisions that operate in the civil aviation and defence markets.

The former of these businesses is the largest and has suffered from a significant drop-off in activity this year. Further, as noted above, the airline industry is not projected to return to growth until around 2025.

This makes it hard for me to place a value on Rolls-Royce shares. While I think the organisation does have a very valuable franchise, it could be years before the group is able to live up to its full potential.

And with that being the case, I’m not confident placing a value on the firm right now.

A lot could happen in five years and I don’t have a crystal ball to tell the future. While I think it’s unlikely the group will collapse, I believe there could be further uncertainty ahead, which wouldn’t be positive for Rolls-Royce shares.

The bottom line

Put simply, in my view, it’s impossible to tell if Rolls-Royce shares are a bargain stock to buy right now at 80p. If the company is able to stage a recovery in the next few years, the stock may rise from current levels.

If the business continues to struggle however, the value of the business may stagnate or even decline. As the outlook for the enterprises highly uncertain, it’s almost impossible for me to say which path the stock will take.

In the meantime, there are plenty of other businesses that offer better growth prospects. In my view, investors would be better off concentrating on these firms rather than Rolls-Royce shares, considering their uncertain outlook.

The post At 80p, are Rolls-Royce shares a bargain stock to buy right now? appeared first on The Motley Fool UK.

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Rupert Hargreaves 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.

Motley Fool UK 2020