Is Rolls-Royce a Good Stock to Buy and Play the Recovery Story?

Rolls-Royce stock has been among the worst-performing stocks this year. The stock fell to multi-year lows amid concerns about the company's survival. While the stock has recovered and recoupled some of its losses amid the rally in beaten-down cyclical stocks, it's still down over 50 percent for the year. Is Rolls Royce a good stock for investors to buy now and play the economic recovery story?

Rolls Royce shares trade on the London Stock Exchange under the ticker symbol “RR.” U.S. investors can buy the stocks on the OTC markets where it trades under two ticker symbols “RYCEY” and “RYCEF.” However, most of the trading in Rolls-Royce in OTC markets takes place under the ticker symbol RYCEY.

The sentiment on Rolls-Royce is mixed on Stocktwits. Username WhatNowBear sees the stock as a discount buy. Among other things, the user is bullish on Rolls-Royce stock due to its business restructuring and an uptick in the business after the COVID-19 pandemic.

Rolls-Royce investors will have to watch these themes. The rally in beaten-down sectors might continue into 2021. However, RYCEY’s problems predate the coronavirus. There have been issues with the company's Trent XWB-84 and Trent 1000 engines.

To make things worse for Rolls-Royce, the demand for wide-body planes whose engines it specializes in has cratered during the COVID-19 pandemic. However, the company intends to utilize the current time for developing new technologies. The company is contemplating a re-entry into the narrow-body plane market.

Rolls-Royce suspended its dividend in 2020 amid macro uncertainty arising from the COVID-19 pandemic. Many companies, especially cyclical companies whose business was the worst affected by the lockdowns, suspended their dividends this year.

According to the estimates compiled by CNN Business, RYCEY’s median target price of $3.33 is a premium of more than 90 percent over its current prices. Three analysts recommend a buy, while six recommend a sell. The remaining eight analysts polled by CNN Business recommend a hold.

Rolls-Royce has raised a lot of capital this year, including equity and debt issuance. While the capital raise would help the company address the near-term survival question, it comes with a long-term cost. The interest and the principal on the debt have to be serviced back, while the discounted rights issue would lead to a higher number of outstanding shares and earnings dilution.

However, Rolls-Royce is an iconic British company. The government might step in to bail out the company if its problems amplify. Rolls-Royce stock could be a good buy if you can digest the high volatility. It's among the best ways to play the economic recovery and normalcy story in a post-COVID-19 world. The stock trades at an NTM EV-to-revenue multiple of 1.24x, which seems reasonable given the risk-return tradeoff.