Should I snap up Rolls-Royce shares while they’re under a quid?

Rolls-Royce (LSE: RR) shares have had a poor run recently. Year to date, they’re down nearly 30%. As a result, they can now be picked up for under £1.

Buying stocks after they’ve had a big fall can sometimes pay off handsomely. Should I buy Rolls-Royce shares for my portfolio then? Let’s take a look.

Three reasons to buy Rolls-Royce shares today

I can see plenty of reasons to be bullish on Rolls-Royce right now. For starters, revenues and profits are expected to rise in the years ahead as air travel continues to pick up (it generates a large chunk of its revenues from servicing aircraft engines).

The table below shows analysts’ estimates for revenue, net profit, and earnings per share (EPS) this year and next. What stands out to me here is that net profit and EPS are expected to rise significantly in 2023. EPS, for example, is projected to rise 132%.

2021 2022E 2023E
Revenue (£m) 11,218 11,605 12,727
Net profit (£m) 124 137 362
Earnings per share (p) 1.48 1.90 4.40

There’s no guarantee Rolls-Royce will achieve these 2023 figures. However, if it’s looking likely that the company will, the share price could get a boost.

It’s worth noting that in a recent trading update, CEO Warren East said: “We continue to expect positive momentum in our financial performance in 2022 despite the ongoing risks around macroeconomic uncertainties.”

Secondly, the company could benefit from its exposure to the defence industry. In its recent update, it noted it had a strong order book in this area of the business. It also said governments are increasing their long-term budget allocations towards defence activities, underpinning the long-term growth outlook here.

Additionally, Rolls-Royce is making investments in a number of net-zero-related businesses. The group believes these could potentially add £5bn to its revenues by the early 2030s. In its recent update, it said that it continues to make good progress here.

Could the share price keep falling?

Having said all that, there are several things that concern me in relation to Rolls-Royce shares.

One is that the company’s recovery could be hampered by the disruption in the travel industry. Right now, airlines across Europe are having to cancel flights due to staff issues. Meanwhile, in China, less people are flying due to lockdowns. These issues could hit Rolls-Royce’s revenues and profits.

It’s worth noting that short interest has been rising here recently. Over the last three months, the number of Rolls-Royce shares on loan has risen from around 120m to 320m. This suggests that hedge funds and other sophisticated investors believe that the company may not achieve its financial targets, and that its share price will fall.

Another concern is debt on the balance sheet. At the end of 2021, the group had long-term debt of around £7.5bn on its books. In a rising-interest-rate environment, this adds risk as interest payments are going to increase.

There’s also the valuation. At the current share price, Rolls-Royce trades on a forward-looking P/E ratio of 48, falling to 21 using next year’s EPS forecast. These valuations are quite high. In other words, the stock isn’t cheap. It’s worth pointing out that analysts at JP Morgan have a price target of 70p. That’s 24% below the current price.

My view on Rolls-Royce

Weighing everything up, Rolls-Royce shares are not a buy for me right now. All things considered, I think there are safer stocks to buy.

The post Should I snap up Rolls-Royce shares while they’re under a quid? appeared first on The Motley Fool UK.

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Ed Sheldon has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. 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.