Is the Rolls-Royce share price NOW too cheap for investors to ignore?

Fresh fears over the global banking crisis have sent shares right on FTSE 100 soften again. Machine builder Rolls-Royce‘s (LSE:RR.) share price has dropped another 3% in last week’s trade. closed at 142.9p per share.

The blue chip has now fallen 11% from the multi-year high of 160p hit two weeks ago. It is currently trading at a forward price-to-earnings growth (PEG) ratio of just 0.2.

Any reading below indicates that the stock is undervalued. But I wouldn’t plan on adding this FTSE to my own stock portfolio. That’s why I think investors should avoid Rolls-Royce shares.

bounce back

Revenues and profits are on the rise again after the end of the Covid-19 lockdown. The business derives much of its revenue from civil aircraft engine servicing, which is seeing a surge in demand as people take to the skies again.

Prospects here have improved since the end of 2022 after the lifting of pandemic restrictions in China as well. In fact, emerging markets like these create tremendous long-term profit opportunities for companies like Rolls-Royce.

The number of jets operating will balloon in the coming decades as the number of travelers from Asia, Africa, and Latin America balloon. Airbus predicts that global passenger traffic will grow at an average of 3.6% per year over the next 20 years.

As airlines build up their fleets to accommodate this, Rolls could see engine orders and aftermarket profits rise from current levels.

Turbulence

But despite this, I don’t want to buy Rolls-Royce shares. The first concern is that new sales and earnings could stall if the travel industry slows down again.

High inflation and central bank interest rate hikes pose a constant threat to demand for tickets from tourists and business travelers. And if the contagion in the banking sector spreads and the global economy collapses, travel activity could fall off the cliff.

Many cyclical stocks face uncertainty in the current climate. But I’m especially worried for Rolls given the huge debt on the balance sheet. The cost of servicing net debt of £3.3bn is colossal. And will struggle to pay for this if profits suddenly dry up.

Analysts at JP Morgan new chief executive Tufan Erginbilgic’s new plan to organically eliminate the balance sheet as “risky strategy“. He said the plan was to leave the company “very vulnerable to unexpected shocks in the next few years“.

There are several factors at play I believe could see such a shock materializing.

A show I will avoid

I am also concerned that Rolls-Royce may fail to effectively capitalize on the long-term growth in civil aviation.

It faces stiff competition from industry giants like GE Aviation and Pratt & Whitney for engine sales. These companies are also a major threat to the FTSE company’s planned return to the narrow aircraft market.

As I said, the Rolls-Royce share price looks cheap on paper. But on balance I think there are more attractive UK value stocks to buy now.