Rolls-Royce share price is cheap by 21.8%: Is it a buy?

on Oct 24, 2022
  • Rolls-Royce stock price has plunged by 50% from its 2021 high.
  • Its business fundamentals in aviation and defence are strong.
  • A DCF valuation shows that the stock is about 21.8% undervalued.

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The Rolls-Royce (LON: RR) share price has been in a freefall this year despite strong macro fundamentals. The shares have plunged by more than 50% from their highest point in November last year. They are hovering near the lowest level in November 2020.

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Strong fundamentals

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Rolls-Royce share price has plummeted in the past few months even as its key segments make some improvements. For example, earnings published by airlines like IAG and Delta Air Lines showed that the civil aviation industry was doing well. 

Tourism and business travel have increased rapidly despite the rising inflation and flight cancellations. This performance is great for Rolls Royce since it makes a bulk of its revenue and profitability in the industry.

In addition to selling engines, Rolls-Royce Holdings has long-term contracts with most of its customer airlines. These service contracts are some of the most profitable ones for the company. Therefore, an increase in the number of flight hours leads to more profits for Rolls-Royce Holdings.

Rolls-Royce is also benefiting from a rising demand for private jets despite a crash of global equities slump. Recent data by WingX showed that the number of private jet take-offs rose to more than 3.3 million in 2021. This is also notable since Rolls-Royce has a strong market share in the industry.

Meanwhile, with a war going on in Ukraine, defence spending has increased sharply this year. Western countries like the United States and those in Europe have boosted their spending. Last week, Lockheed Martin said that it will repurchase $14 billion worth of shares as its cash flow rose to $3.13 billion. Rolls-Royce is a major defence contractor.

Rolls-Royce shares are also significantly cheap. A DCF calculation by Simply Wall St shows that its fair value is about 94p, compared to 74p. This means that the stock is about 21.8% undervalued. Its other valuation metrics are also lower than its peers.

Rolls-Royce share price

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Rolls-Royce share price

So, is it safe to buy Rolls-Royce stock? The daily chart shows that the RR share price has been in a bearish trend in the past few months. In this period, it has managed to move below the key support level at 77.72p, which was the lowest level on May 9 of this year.

It has moved below all moving averages while the Relative Strength Index (RSI) has tilted upwards. The shares also formed a double-bottom pattern. Therefore, the stock will likely continue rising as buyers target the resistance at 90p.


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