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of Rolls Royce ( LSE:RR )’s share price continues to decline as concerns about runaway inflation mount.
At just over 70.6p, the engineering company’s share price is sinking to its cheapest since November 2020.
My first instinct is to avoid the engineer and look for stocks with less risk. But the shares are cheap on paper and could take off if market confidence suddenly improves.
Today FTSE 100 The company trades at a price-to-earnings growth (PEG) ratio of 0.2. Any reading below 1 indicates that a stock is undervalued.
So should I buy Rolls Royce shares for my portfolio? Or is it better to avoid this competitive inventory at all costs?
Is recovery at risk?
The twin threats of inflation and rising interest rates are currently weighing heavily on stock prices. They threaten to crush consumer spending and business spending on travel, thus jeopardizing the airline’s post-coronavirus recovery.
Comments from Gatwick Airport’s chief financial officer reveal an uncertain outlook for the travel industry. Jim Butler said recently. Financial Times that he was”Be careful about what we see in winter or next yearHe said.
“Cost of living crisis,” he added.It can affect the general tendency to travel.He said.
This poses a problem for Rolls-Royce as engine flight hours may drop again. In addition, further weakening of airline profitability could reduce demand for new aircraft and, consequently, the company’s hardware sales. This can have a significant impact on long-term earnings.
FX pressures
Shares in Rolls-Royce are sinking as it accelerates spending. The business was hit hard by the fallout from supply chains, inflation and the Ukraine war between January and June. These pushed the loss to £1.6bn in the first half.
The company explained such issues.It will continue in 2023He said. As a potential investor, I worry that they might be too tough and last longer than expected.
Finally, I worry about how the sinking pound will affect Rolls-Royce’s bottom line. Above all, the company took £464m from negative foreign exchange movements in the first half of 2022.
Sterling fell to a low of $1.03 earlier this week. And interestingly, a fall below parity for the dollar (and euro) is becoming increasingly likely as traders flee UK assets.
The verdict
Look, I don’t think Rolls-Royce is a complete basket case.
The travel sector is likely to remain stronger than the picture I described above. Sales of the engines to defense customers are likely to increase as the business continues to increase arms costs. Focusing on green technologies such as low-emissions engines and nuclear reactors is a smart move as the fight against climate change intensifies.
But all things considered, I think the risks of buying this FTSE 100 stock far outweigh the potential benefits. And Rolls-Royce in particular still has £5.1bn of net debt to deal with. I now prefer to buy low risk UK stocks.