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Is it time to double down on the Rolls-Royce share price?

Rupert Hargreaves
·3-min read
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The coronavirus crisis has hit the Rolls-Royce (LSE: RR) share price like a sledgehammer. As the demand for air travel around the world has collapsed, so has the company’s income.

It doesn’t look as if this trend is going to end any time soon either. Analysts don’t expect the aviation industry to return to 2019 levels of activity until at least the middle of the next decade.

Due to these pressures, the Rolls-Royce share price has crumbled to levels not seen since 2004.

However, after these declines, the stock is starting to look attractive from a value investing perspective.

With that in mind, today, I’m going to take a look at the business to establish whether or not it could be worth doubling down on this value stock.

Rolls-Royce share price on offer?

One of the biggest threats overhanging the aerospace company this year has been its solvency.

As the group’s profits crumbled, analysts started to question the strength of its balance sheet. This sparked rumours that the company might have to be bailed out by the UK government.

Luckily, it seems as if the group has managed to avoid this fate. Last week it announced a £5bn funding package. The funds will come through a combination of a rights issue, and additional lending. This should meet and offset any concerns investors may have had about the company’s solvency and help the Rolls-Royce share price.

I think this is an excellent move by the business. By shoring up its balance sheet, Rolls should be able to pull through the crisis.

It will also restore confidence among customers. The group relies on income from the service contracts it sells with each engine produced.

These service contracts extend over many years. Third-parties are unlikely to want to enter into a multi-year agreement if there are questions about the seller’s (which in this case is Rolls-Royce) solvency. A healthy balance sheet should help restore confidence among the company’s customers.

Improving outlook

As such, I’m optimistic about the outlook for the Rolls-Royce share price. The company is one of only two major aircraft engine manufacturers in the world. It’s not going to lose this competitive advantage any time soon.

What’s more, the cash call has only strengthened the advantage, in my opinion. As the global aviation industry recovers from the pandemic, Rolls should benefit. Further, the company’s range of energy-efficient engines should prove popular with aircraft manufacturers as the world moves to a more sustainable future.

Having said all of the above, while I’m optimistic about the outlook for the Rolls-Royce share price, I think the group will encounter further turbulence in the years ahead. As such, it may be best to own the stock as part of a diversified portfolio. This will help minimise losses if the company continues to struggle.

So overall, if you already own the shares, it might be worth doubling down on the stock after recent declines.

The post Is it time to double down on the Rolls-Royce share price? appeared first on The Motley Fool UK.

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Rupert Hargreaves owns no share 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