Rolls-Royce Holdings (LSE:LON:RR) is enduring a turbulent year. The FTSE 100 manufacturing giant is continuing to lose a lot of money thanks to the rapid decline in international air travel. A month ago, the RR share price reached a high of £4.64, but it has since fallen 42% at the time of writing. Does this now make it a cheap stock worth buying?
RR share price decline In its half-year results released this week, it confirmed it had spent £3bn in cash in response to the crisis. After implementing cuts to spending, it expects cash flow for the second half of the year to be better, providing the aviation industry gets back to business. However, with the pandemic still raging, Rolls-Royce continues to face turmoil ahead.
In April it announced it is cutting 17% of its workforce, resulting in over 9,000 redundancies. This will help with its ambition to realise annual savings of £1.3bn by the end of 2022. The RR share price briefly reached a high of £7 in February but is unlikely to reach that level again for several years. Many shareholders will nurse their losses for a long time.
Nevertheless, it is not solely reliant on air travel. Rolls-Royce is a world-renowned company specialising in the manufacture of vital pieces of modern engineering. It has five divisions: Civil Aerospace, Defence, Power Systems, Nuclear and R2 Data Labs. While its aviation business is suffering, its defence business has been coping. Geopolitical uncertainty is keeping governments on high alert and they are continuing to place orders. The crash in the oil price has also affected its Power Systems division, but the price of oil is steadying, and I think long term it will recover well.
I find the work of the R2 Data Labs intriguing with huge potential for future progression. It manipulates big data and artificial intelligence (AI) to deliver technology of the future. This includes creating a virtual copy of each component it builds. Establishing a complex virtual environment gives it a futuristic way of analysing the performance of everything it builds. This will no doubt help it in its aim to deliver planet-friendly power solutions.
Risk versus reward I wrote about this FTSE 100 stock last month, concluding it was a risky buy. I still feel the same way, but if risk/reward is what you are after, then the RR share price could be worth watching. It is a powerful company at the cutting edge of technological innovation. It has a lengthy history of success, so I imagine it will get through these economic difficulties and recover. However, considering the uncertainty ahead for international air travel, its troubles are far from over. There is no dividend on offer to sweeten the deal, and I think the RR share price could well have further to fall. I would not rush to buy just yet. BAE Systems (LON:BAES) is an alternative FTSE 100 constituent I’d buy in the defence sector.
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Kirsteen 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.
Motley Fool UK 2020
First published on The Motley Fool
