After a 10% resurgence in 2021, British engineering company Rolls-Royce (LSE:RR) looked set to carry this momentum forward to 2022. But its share price is down a whopping 28% this year. Analysts say this is a result of the Omicron spread, escalating political tensions and CEO Warren East’s decision to quit the company at the end of 2022. Now trading as a penny stock, is the Rolls-Royce share price the best long-term FTSE 100 bargain for my portfolio right now?
Steady improvements
While the pandemic hit the aviation industry hard, 2021 was largely a year of recovery. Rolls-Royce reported a marked increase in flying hours in the second half of 2021, which helped the company edge closer to a positive cash flow. With the civil aviation sector still a long way off pre-pandemic levels, the company also went through a massive restructure in a bid to diversify its income stream.
The company shed nearly 9,000 staff members, sold smaller holdings and streamlined the aerospace arm of the business. But since large planes were still mostly grounded last year, civil aviation recorded a net loss of £172m last year. But this is a vast improvement from the £2.5bn net loss in 2020, thanks to the restructuring efforts.
Overall, Rolls-Royce managed to generate an operating profit of £414m in 2021 primarily due to its defence wing. In fact, global weapons spending has increased a lot in the last decade and Rolls-Royce benefited from this. Defence equipment sales generated £457m last year and the current order book value stands at £6.5bn.
Prolonged recovery
But I see a big concern with the Rolls-Royce share price at the moment. The company still has a huge debt pile. Although recent disposals are expected to generate around £2bn in proceeds, the current debt pile stands at a whopping £5.2bn. Given how volatile the share price has been over the last 24 months, I think even a slight misstep by the company or another Covid setback this year could force a panic-sell.
While this is a concern for me, I’m looking at a long-term play with the Rolls-Royce share price. And I think the company has some impressive projects that are coming to fruition at the right time.
With the electric vehicle (EV) revolution under way, Rolls-Royce is pioneering an electric aircraft that has already broken three world records for being the world’s fastest all-electric aircraft. And this project already has pre-orders worth $5.2bn from some of the largest commercial airlines in the world. If this project takes off, RR could attain Tesla-like status in the electric aircraft space.
The company is also developing Small Modular Reactors (SMRs) to create remote power stations that can generate clean energy. The board expects first orders in a couple of years and grid integration in the UK in the 2030s. As of now, one SMR can produce 230 tonnes of clean Hydrogen fuel a day.
Both the EV and green energy sectors are expected to grow significantly in the next decade. And given RR’s history of engineering R&D, I think it is a real possibility that these projects successfully reach the market. Although the Rolls-Royce share price is volatile right now, I see a lot of long-term potential here. I would consider an investment if the share price falls below 80p in the coming weeks.
Suraj Radhakrishnan 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.
