At first glance Rolls Royce (LSE: RR) Stock prices look cheap in terms of price. The stock is currently trading at 98p, well below its five-year high of 378p.
As a value investor, this is getting my attention. I like buying stocks when companies are trading at low prices, and for now it looks like aerospace group stocks are in that territory.
Buying stock at a low level does not guarantee profits. In fact, it doesn’t guarantee anything. Still, I’m aware of the level of risk it entails, so that’s a strategy I can fully adhere to. Not suitable for all investors.
Rolls-Royce strains under pressure
Before buying a company, I’m always trying to understand why stocks are traded that way. Rolls-Royce is under tremendous pressure. The pandemic caused the group’s earnings to plummet and cash to pop out of the door sooner than it arrived.
According to the company’s latest trading update £ 2 billion cash outflow in 2021.. This is just a rough guide.
Most of the group sales are due to aircraft engine maintenance contracts. These are based on the number of flight hours recorded by each unit. Therefore, the longer the Rolls engine is empty, the higher its profits.
In addition to the latest information on the latest deals, the company warns:Significant uncertaintySurrounding the recovery of the global aviation industry. In short, the £ 2bn cash outflow forecast could be subject to significant revisions.
To offset the uncertainty, management cut about 7,000 jobs in 2020. We plan to lose a total of 9,000 jobs by the end of 2022.
All of the above suggests a pretty terrible outlook for Rolls-Royce stocks. But in the next three to five years, the fate of the company may improve.
Management believes that the recovery in flight times could lead to free cash flow of £ 750m by 2022. Achieving this goal could add to investor interest in equities.
The uncertainty surrounding this goal is similar to the numbers above, but the final numbers are ultimately Much better Or worse than expected.
Still, Rolls has a lot of money available to support that turnaround. After raising additional funding from investors last year, the company has £ 9 billion in liquid cash. This should help businesses stay on the light for at least 2021. This is based on current management cash outflow forecasts and is subject to change.
The group also has a strong defense business, helping to generate the long-awaited cash flow over the last 12 months.
On the plus side, the company has a solid balance sheet and is expected to return to cash flow potential next year. On the downside, these predictions are not guaranteed and Rolls-Royce burns cash every day.
Therefore, I would like to wait for what happens to my business before buying the shares of Rolls-Royce. If the company can achieve its goal of generating positive free cash flow by 2022, it could be cheaper. But the company warns that.Significant uncertaintySurrounding that prediction, “recovery is never guaranteed.
Rupert Hargreaves does not own the mentioned share. The Motley Fool UK does not have a position in any of the listed shares. The views expressed about the companies mentioned in this article are those of the author and may differ from the official recommendations made by subscription services such as Share Advisor, Hidden Winners, and Pro. Here at The Motley Fool, by considering different insights, Better investors than us.
Need to buy Rolls-Royce stock?
https://www.fool.co.uk/investing/2021/01/27/should-i-buy-rolls-royce-shares/ Need to buy Rolls-Royce stock?