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FTSE 100 stock in focus: is the Rolls-Royce share price a good buy?

Kirsteen Mackay
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From civil aerospace to defence and power systems, Rolls-Royce Holdings (LSE:RR) has suffered years of underperforming and disappointing shareholder returns. And since falling off a cliff in March, the Rolls-Royce share price has further endured a volatile few months with fears of a dismal future ahead. Expectations have been lowered, but hope is not completely lost. Some investors are keeping the faith as an appetite for risk returns to the FTSE 100. This can be seen as its fluctuating share price rises once again. So, does this mean Rolls-Royce is a good stock to buy?

Ratings slashed

Prime Minister Boris Johnson announcing an easing of the coronavirus lockdown provided a welcome boost for out-of-favour stocks that had lost their appeal in the wake of the pandemic. This was reflected in sales of Rolls-Royce shares, as they picked up pace in the second half of May. But the gains were quickly wiped out at the end of last week.

In a major blow to the FTSE 100 manufacturer, rating agency Standard & Poor’s (S&P) cut its investment rating to BB. This means below investment-grade, also known as junk, which will discourage institutional investors from continuing to buy shares in Rolls-Royce. This results from the global air travel disruption caused by the pandemic.

S&P designs its ratings based on how likely a company is to meet its debts and continue paying income on corporate bonds to investors. A junk rating is a disappointing status to receive, particularly for such a high-profile company. The rating will probably push up borrowing costs and make it more difficult to raise capital.  Perhaps it was inevitable after Rolls-Royce warned it faces several years of struggle ahead for its commercial aviation division and at least 9,000 job cuts. 

External challenges and internal woes

Besides pandemic disruption, the travel and aerospace industry has been facing increasing climate change issues, the Boeing 737 Max scandal and tightening of cybersecurity policies. It is an industry that requires astronomical levels of cash and manufacturing prowess. Hiring and keeping talent is key to progress, but also comes at a considerable cost. Upgrading manufacturing technologies regularly is expensive, but vital to stay relevant and ahead of the game. It is also increasingly competitive and reliant on government defence budgets that fluctuate with the times.

Today the Rolls-Royce share price is rising again. Its reputation for quality craftsmanship and design could be partly driving this. However, I doubt its rising share price reflects savvy investors stockpiling shares in a quality company.

Rolls-Royce cut its dividend in April, and earnings per share are negative. It has a high debt ratio and with its BB rating, this makes it a speculative stock to buy. There is no doubt aerospace and travel face major ongoing uncertainties and I think it would be risky to suggest otherwise. I do not think the Rolls-Royce share price is a good buy, particularly for beginners to stock market investing.

The post FTSE 100 stock in focus: is the Rolls-Royce share price a good buy? appeared first on The Motley Fool UK.

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Kirsteen 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.

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