Rolls Royce Share Price is Down 67% This Year – Is it a Value Trap?

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Rolls Royce share price is under siege. The stock is the worst performer in the FTSE 100 today and is trading at the lowest level since August 4. It is down by almost 8% and is trading at 221p.

Why Rolls Royce stock is under pressure

Rolls Royce share price has declined by more than 70% in the past five years. This year alone, it has fallen by more than 67%.

There are several reasons why the iconic engine maker’s stock has been plummeting. First, the company spent millions of dollars to repair the Trent 1000 engine when cracks started appearing in 2018. That was a major crisis that led the company to report its first major loss in years.

Second, the company has been affected significantly by the coronavirus pandemic that has affected air travel. Specifically, the stoppage of intercontinental travel has affected the company because its engines are mostly used in wide body planes. As a result, the company recorded a £5.4 billion pre-tax loss in the first six months. In the same period, revenue fell to £5.8 billion while cash outflow increased to £2.8 billion.

Rolls Royce share price has also weakened because of evaporating investor confidence. A few months ago, ValueAct, the American value investor decided to sell all its shares in the company. Last week, the company announced that it would sell assets to raise more than £2 billion. There are also talks about the firm issuing new shares, which will dilute long-term investors.

There are some positive things about Rolls Royce and its share price. First, the shares are cheap, when you compare to other industrial companies. This means that value investors will likely scoop the shares once international travel resumes. Second, Rolls Royce has a lot of liquidity and is currently cutting costs. It is cutting more than 9,000 jobs and has saved more than £350 million. It also has £8.1 billion in cash and credit facilities.

So, is Rolls Royce stock a buy? At this point, analysts have mixed opinions about the company. For example, analysts at JP Morgan are extremely pessimistic because they expect the shares to sink to 80p. On the other hand, analysts at Citigroup expect the shares to more than double to 564p.

Rolls Royce share price forecast

The weekly chart below shows that Rolls Royce share price has been under pressure since 2018 when it reached 1100p. Since then, it has fallen to a multi-year low. In recent weeks, it has been in a sharp decline also. The price is below the short- and longer-term moving averages too. Therefore, there is a possibility that the price will remain under pressure in the near term. On the other hand, a move above the June high of 429p will invalidate the bearish case.

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Rolls Royce Technical Chart

Rolls Royce share price

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