British engine company Rolls-Royce (OTC:RYCEY) is among the most embattled manufacturing stocks of the past few years. After falling dramatically as the effects of the pandemic set in, Rolls-Royce never fully regained its footing. This situation produced steep losses for shareholders and left the stock trading at massive discounts to its previous highs.
Because of these circumstances, there’s a very real possibility that Rolls-Royce is currently trading below its intrinsic value. So what is the Rolls Royce stock forecast now?
What Does Rolls-Royce Do?
Although its name is most frequently associated with a line of luxury automobiles, Rolls-Royce is a diversified company that manufactures engines and turbines for various applications worldwide.
The company designs and creates marine and aircraft engines for civilian and military use, gas turbines for power generation and oil pumping equipment.
Source: Pixabay
Is Rolls-Royce a Good Stock?
By some metrics, Rolls-Royce is an attractive stock at today’s prices. It carries a high forward P/E ratio at 66.60, but this high multiple is largely the result of earnings that have been severely depressed since the onset of the pandemic.
Rolls-Royce also appears to have at least the potential for significant upside.
Based on 13 analyst price forecasts for Rolls Royce currently available, the stock is expected to increase from its current price of $1.11 to a median target of $3.48 over the next year. That would represent a return of 213.22 percent. Even if the stock advances by a fraction of this amount, it could still handily outpace historical market returns.
When we ran the numbers we were a lot less optimistic than analysts overall but still see upside potential. A fair market value assessment reveals an intrinsic value per share of $1.36, representing 22% gain opportunity.
In terms of its recent performance, however, it’s nearly impossible to argue that Rolls-Royce has been a good stock for its shareholders. Over the last five years, the stock has lost approximately 90 percent of its value. While most of this loss was due to the pandemic, the stock was already sold off going into 2020.
Rolls-Royce Revenue and Earnings
Because Rolls-Royce is based in the United Kingdom, it operates under different reporting standards than American companies. Specifically, Rolls-Royce reports its financial results semi-annually instead of quarterly.
In the most recent report, the company detailed EPS of -$0.02 per share against estimated earnings of $0.01 per share. While this was a miss, it represented a vast improvement from the previous year when EPS was -$0.088.
Over the trailing 12 months, the company reported $11.22 billion in revenue and made a gross profit of $2.14 billion. This translated to a total net income of $123 million.
Year-over-year revenue growth has been quite anemic at just 4.1 percent. Earnings, however, improved by nearly 80 percent, bringing the company close to breaking even in the most recent reporting period. Without higher revenue growth, though, it’s difficult to see how Rolls-Royce can break out of its current losing streak anytime soon.
Slim Margins + Debt = Risky Bet
The most glaring risk factor for Rolls-Royce is its very low margins. Over the past year, Rolls-Royce has reported an operating margin of just 4.15 percent. Without higher margins, the company will be hard-pressed to expand its earnings enough to justify its high price multiple.
Debt is also a somewhat concerning feature of the Rolls-Royce balance sheet. As of the most recent reporting, the company owes $7.88 billion and has a cash position of just $2.63 billion.
This could make it difficult for Rolls-Royce to borrow additional money for new research and development investments at attractive interest rates.
Servicing existing debt will also put a drag on the company, reducing overall profitability and earnings.
A final consideration for potential Rolls-Royce investors is that the company could still have more room to fall as the worldwide economy cools. Unlike many other companies, Rolls-Royce did not see its share prices recover appreciably in 2020 or 2021. If a major recession sets in, investors could see further losses due to falling demand for industrial and power equipment.
Is Rolls-Royce Stock a Buy or Sell?
Taking all of these factors into account, Rolls-Royce appears to be a good stock to hold if you already own it. Nothing about it is concerning enough to recommend selling, especially when it could be in the early stages of a rebound from the challenges of the past two years.
Debt and low margins are certainly concerning, but the company’s current trajectory could allow long-term shareholders recoup losses.
However, the stock also isn’t a particularly strong buy. While the potential upside and value do appear attractive, the company doesn’t appear strong enough to actively buy into at the moment.
With high debt, a recession looming and extremely low revenue growth, Rolls-Royce likely isn’t the best asset to buy right now. This is especially true in a sold-off market with many potentially good investment opportunities.
Rolls-Royce could be worth keeping an eye on, though, as future improvements in earnings or margins could create opportunities for investors to buy.
At just over $1 a share, Rolls-Royce seems compelling but remember a company that drops from $1 to $0 or $100 to $0 each produces a 100% loss for shareholders. The cheap price tag shouldn’t compel a buy.
Investors who take a “wait-and-see” approach could still realize good returns by buying in once Rolls-Royce is firmly in a recovery. For now, however, the stock’s risks likely outweigh its benefits.
Where Can I Buy Rolls-Royce Stock?
If you choose to watch Rolls-Royce for signs of improvement, you’ll want to have the opportunity to buy the stock if and when it becomes a more apparent buy. While Rolls-Royce stock is an over-the-counter foreign stock, it is high-profile enough to be available on many major brokerages, such as Schwab and thinkorswim.
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