Image Alt

The Investing Box

  /  Editor's Pick   /  What I think a UK recession means for Rolls-Royce shares

What I think a UK recession means for Rolls-Royce shares

Young woman wearing a headscarf on virtual call using headphones

The UK is expected to enter a recession later this year. The Bank of England anticipates this could last well into 2023. Not all companies do badly in a downturn, as their strength or weakness depend on the sector and the type of customers involved. Given that Rolls-Royce (LSE:RR) has a range of revenue streams from defence to civil aerospace, here’s how I think Rolls-Royce shares could handle a recession.

Benefiting from the restructure

A recession is technically two quarters of negative GDP growth. The other key elements that usually come with a downturn relate to higher unemployment, lower consumer spending and low investor confidence.

In terms of higher unemployment, headlines about companies laying off staff are negative for the share price. For Rolls-Royce, I don’t actually think the business will need to cut back in this regard. Over the past couple of years, it’s been going through an extensive restructure anyway.

Back in the middle of 2020, it announced 9,000 job cuts. The business is now a more efficient, streamlined operation than it was a year or so ago. Therefore, although it’s not a perfect company, I don’t see it needing to make further large job cuts due to a recession. This would be a good thing for the share price.

A good customer base

During a recession, we all tighten our belts when it comes to spending. For Rolls-Royce, it doesn’t sell directly to consumers, so the impact is softened.

For example, in the latest results released last month, the business spoke of the strong order book for the defence division. Its customers are mainly government departments, with new US military contracts announced earlier this week.

Of course, governments will also need to trim spending in some areas during a downturn. But this isn’t to the same extent as ordinary people. It’s also unlikely to cut back on key areas like defence.

So I think that if anything, the reliance on governments and corporates as customers is actually a good thing for Rolls-Royce shares.

My take on the shares

I don’t actually think that Rolls-Royce will suffer during the recession as much as other sectors. The risk to my view stems from the civil aerospace division. The fate of this arm is largely determined by how well the aviation sector does in general. If fewer people fly for pleasure or business during the recession, this will lower flying hours. That will negatively impact the need for servicing and other offerings from Rolls-Royce.

It’s also true that the share price is already down 30% over the past year. Over three years, the loss is 75%. So there does come a point at which the share price will struggle to materially fall further unless it’s going bankrupt.

I think that the looming recession isn’t a huge issue facing Rolls-Royce. I’m keen to invest small amounts regularly over the next year in the business, targeting a longer-term move higher.

The post What I think a UK recession means for Rolls-Royce shares appeared first on The Motley Fool UK.

5 stocks for trying to build wealth after 50

Markets around the world are reeling from the current situation in Ukraine… and with so many great companies trading at what look to be ‘discount-bin“ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. We believe these stocks could be a great fit for any well-diversified portfolio with the goal of building wealth in your 50’s.

Claim your free copy now

setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);

More reading

Jon Smith 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.