It’s been a rocky two years for Rolls-Royce (LSE:RR) shares. After the pandemic decimated the engineering firm’s revenue stream, the stock plummeted and has limped on since. But with the pandemic slowly becoming a thing of the past, is the share price now too cheap? Let’s explore the potential of this business. And whether now is an incredible buying opportunity for my portfolio.
Hope for Rolls-Royce shares
As the pandemic struck, many companies found themselves struggling to stay afloat. Rolls-Royce was no exception. And with its aerospace division generating the bulk of its revenue at the time, the situation quickly became dire.
With few options available, management was forced to take on new loans in 2020. This further increased the company’s leverage, but it provided precious breathing room to come up with a plan. Since then, the company has undergone a drastic structural overhaul.
It has disposed of approximately £2bn worth of non-core assets and sadly, 9,000 workers found themselves without a job. As unpleasant as the restructuring process can be, it may have saved the company from the brink of bankruptcy.
The proceeds of the disposals are going to be used to pay down debt and strengthen the group’s fundamentals. Meanwhile, approximately £1bn worth of annual savings is expected to have been achieved at the end of 2021.
Combining this with the ongoing recovery of the travel sector, the business may be primed for a rapid recovery in 2022. So, why aren’t Rolls-Royce shares climbing yet?
Investor anticipation is building up
It seems investors are holding their breath until the release of the full-year results next month. But the trading updates published throughout last year all pointed towards an accelerated recovery. So, is this a buying opportunity for my portfolio?
Perhaps. It all depends on what the results end up looking like. Suppose management achieves its targets, and demand for the group’s services continues to recover? In that case, I think Rolls-Royce shares could be on the verge of surging as the veil of uncertainty is lifted.
Of course, the opposite is also true. However, the pandemic’s grip on the world is slowly weakening as everyone adapts. That’s why I’m cautiously optimistic about the near-term outlook for Rolls-Royce shares. And at a price-to-earnings ratio of only 2.9, the stock looks incredibly cheap to me!
Having said that, I’m not tempted to add these shares to my portfolio yet. Why? Because even with the capital injection from disposals, the company needs a lot more money to clear its liabilities. In the meantime, all it takes is another round of travel restrictions to land the company close to where it was in early 2020.
For now, I’m going to keep watching from the sidelines. Once the full-year results are out and a clearer picture is formed, I may reconsider my position.
Zaven Boyrazian 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.
