January 23, 2021

The Rolls-Royce share price has tanked. Would I buy this cheap UK share now?

2020 hasn’t been a good year for the stock markets in the UK. Still, many FTSE 100 stocks have managed a fairly decent comeback. Some have even put the worst behind them and their share prices have reached record highs. Others however, are sinking. One example is the engineering company Rolls-Royce Group (LSE: RR), whose share price is at the lowest point in the year. The Rolls-Royce share prices fell almost 6% in yesterday’s trading alone. 



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Is the Rolls-Royce share price attractive?

RR closed at £1.4 per share yesterday, down from a peak of £7.9 earlier in the year. It could be quite tempting to buy this cheap UK share now. I mean, compare this to the FTSE 100 pharmaceutical biggie, AstraZeneca, which has been on a roll this year, and for good reason. The downside for investors is its high share price of £85.5 at the last close, and its earnings ratio gives no comfort either, at a high 52 times. 

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If RR’s prospects looked as good as AZN’s, I would buy it in a heartbeat. But, like many other industrial segments, it too, has seen its fair share of rough weather in 2020. Consider its half-year results, which showed a 26% revenue fall from last year. This is no surprise. Almost half its revenue is from its civil aerospace division, which of course has taken quite the beating this year. One look at the performance of aviation companies like easyJet and IAG makes the funk the sector is in very clear. 

Nevertheless, the Rolls-Royce share price would be worth considering if the future looked strong. Even considering the company’s significance as a supplier for military transport, I’m not convinced from an investment perspective. The company itself expects resilience only from the defence segment. It expects the remaining two – civil aerospace and power systems – to find their groove only in 2022 now. Even before Covid-19 was in the picture, RR was struggling with losses, which will continue in the foreseeable future. It has also suspended dividends. I find it hard to get behind the stock for now. 

Alternative share to consider

But, if low-priced shares are attractive to you, there is still some good news. Promising FTSE 100 companies also have relatively low share prices. One example is Rentokil Initial, which is trading at £5.5 per share right now. Despite its high earnings ratio of 42 times, I’m upbeat on it for two reasons. One, defensives like RTO, the hygiene services and pest control provider, find favour during economic uncertainty. I reckon that the economy will remain in this space in the near future. This means that irrespective of whether or not the earnings ratio is high, stocks like RTO can continue to rise. Two, on average analysts expect its share price to rise from here; UBS is an outlier and recommends selling the share.

Despite the Swiss bank’s caution, however, I think RTO is a far better investing alternative, even though Rolls-Royce’s share price is quite tempting now. 

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Manika Premsingh owns shares of AstraZeneca and easyJet. 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.

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