Rolls Royce share price is among the worst-performers in the FTSE 100 today. The stock is down by more than 7% while the overall FTSE index is down by about 0.20%. The top performers in the index are Persimmon, Taylor Wimpey, JD Sports, and Next PLC. Rolls Royce stock is reacting to a relatively weak trading update released earlier today.
Rolls Royce weak earnings
In a trading update, Rolls Royce revealed that its business has been decimated by the coronavirus pandemic.
The firm said that wide body flying hours had dropped by 50% in the first half of the year and by 75% in the second quarter alone. That was the worst decline in aviation history and was mostly because of the lockdowns that we saw in the past few months.
Flying hours are important for Rolls Royce because the company makes money when planes fly. As I wrote a while back, it usually sells engines at a loss and then gets long-term contracts to manage the engines.
The company’s defence business was resilient while the power segment had a double digit decline. The company also expects to have a shortfall of US dollar receipts in the next seven years. This has seen it reduce the hedge book from the previous $37 billion to $27 billion.
Still, the company’s balance sheet is not bad. It has about £8.1 billion in undrawn revolving credit and about £4.2 billion in cash. In a statement, the CEO said:
“These are exceptional times. The COVID-19 pandemic has created a historic shock in civil aviation which will take several years to recover. We started this year with positive momentum and strong liquidity and acted swiftly to conserve cash and cut costs to protect Rolls-Royce during the pandemic.”
So, is Rolls Royce share price cheap enough to buy?
Rolls Royce share price is cheap because of the problems the firm has had to endure. It is down by more than 60% this year and by more than 70% in the past 12 months alone. Also, Rolls Royce stock price is now at the lowest it has been since May 2005, which is dire for one of the biggest British conglomerate.
The problem with Rolls Royce is that these problems are not about to end. For one, with no coronavirus vaccine or therapy, we expect the travel industry to remain under pressure. For example, we have seen countries that were first to reopen reinstate their travel restrictions. At the same time, travel between continents will take more time to recover. Rolls Royce will suffer because most of the wide-body engines it serves fly across continents. Also, few airlines will be ordering planes any time soon.
Therefore, while we believe that Rolls Royce share price will recover eventually, there is also a possibility that it will remain under pressure for a while. Therefore, investing in Rolls Royce at the current climate is a bit risky.
Rolls Royce share price technical analysis
Rolls Royce stock price is trading at 271p. On the daily chart, this price is below the 50-day and 100-day exponential moving averages. The price has also formed a bearish engulfing pattern after the rally that happened yesterday. Therefore, I expect the share price to continue falling as bears attempt to move below 250p.
On the other hand, a move above 290p will invalidate this trend. This price is above the highest point today.
Disclaimer: Please don’t consider this as trading advice. Do your research before you invest or in Rolls Royce.
Rolls Royce Stock Price Analysis