A FTSE 100 stalwart, Rolls-Royce (LSE:RR) is a giant within aircraft engine manufacturing and power systems. When the pandemic hit, the Rolls-Royce share price plummeted from around the 250p level. Currently trading at 96p, in penny stock territory, is this the bargain of the year?
I already own shares in this company, but should I be thinking about adding more to my long-term portfolio? Let’s take a closer look.
Civil and defence improvements
As the pandemic eases, the firm will be benefiting from increased international travel. The company is paid per flying hour for every aircraft that uses Rolls-Royce engines.
As time passes, revenue from its civil aerospace segment should improve. A recovery in this sense has not yet occurred, as the civil aerospace segment still registered a small loss of £172m for 2021. This was primarily due to lower engine orders by airlines during the pandemic.
The defence segment, which includes work with air forces around the world, reported a profit of just over £450m.
This was bolstered by a contract with the US Air Force to provide the engine replacement programme for the B-52 bombers. If all options are exercised in this contract by the US Air Force, this will be worth around $2.6bn to Roll-Royce.
Investors are also awaiting the outcome of the contract for the Future Long-Range Assault Aircraft (FLRAA) programme in the US. If successful, this could bring in long-term revenue like the B-52 programme.
The Rolls-Royce share price: going nuclear?
Another exciting venture is Rolls-Royce’s nuclear project. The firm is developing technology to build small modular reactors (SMRs).
These are a fraction of the size of conventional nuclear power plants. The SMRs received funding from the Qatari government last December.
What’s more, the UK government’s Energy Security Strategy, published this month, pledged £2bn for the development of nuclear power.
This is part of a wider effort by governments to move away from the use of oil and gas. Indeed, China approved the construction of 150 nuclear power plants last year at an estimated cost of $440bn.
However, investment bank JP Morgan recently slashed its target for the Rolls-Royce share price to 75p. It is sceptical about the returns the SMRs and other ‘new markets’, like electric aircraft, can provide investors.
Despite this, I think that these new ventures will complement the traditional civil and defence segments and make Rolls-Royce a market leader in the years to come.
I have also previously written about the company’s lower price-to-earnings (P/E) ratios compared with competitors like Safran and General Electric. This suggests the company may be cheap, but the more favourable post-pandemic environment and new ventures give me confidence the business can once again deliver for shareholders.
At 96p, the Rolls-Royce share price feels too low. As the world reopens and more emphasis is placed on nuclear alternatives, I think I may look back and view this as the bargain of the year. I will be adding to my current holding soon.
