After a spell of disappointing performance, could we be seeing a turnaround in the fortunes of Rolls-Royce (LSE: RR)? The Rolls-Royce share price has moved up 28% in just a few weeks, although on a one-year timeframe it has lost 37% of its value.
The aeronautical engineer’s shares continue to trade for pennies. But if the recent positive momentum carries on, I think they might hit a pound.
Solid business performance
The company updated the market on Thursday about its current trading. I think the latest news could provide further support for the Rolls-Royce share price in coming months.
The engineer maintained its guidance for the year despite growing challenges such as the impact of inflation on profit margins. The company pointed to a continued recovery across its business including a record order intake in its power division. The recent sale of a subsidiary enabled repayment of a £2bn loan years in advance. Cleaning up the balance sheet and reducing debt should help the company’s economics, so I see this as a positive development.
A key part of the investment case for Rolls-Royce is the sales and servicing revenues it can generate from its aircraft engine division. Large aircraft flying hours remain below pre-pandemic levels — they are 35% lower than in 2019. But the trend is in the right direction, with such flying hours up 35% so far in 2022. Continued recovery should be good for both revenues and profits. That could help boost the Rolls-Royce share price.
Investor confidence and the Rolls-Royce share price
But if Rolls-Royce has simply maintained its full-year guidance rather than raising it, why has the share price been increasing markedly?
I think in the current economic environment, maintaining full-year guidance is a promising sign that Rolls-Royce is doing a good job managing its cost base. That should be good for profitability.
Perhaps investors have also been reassessing the underlying investment case for Rolls-Royce on the basis of the apparent ongoing recovery in its business. As one of a small number of players in an industry with high barriers to entry, Rolls-Royce has strong pricing power. Its installed base of thousands of engines should help it generate revenues for years if not decades to come. The right cost management combined with a healthy balance sheet could see those revenues converted into chunky profits.
On that basis, I reckon we could indeed see the Rolls-Royce share price move above the £1-level again at some point. At today’s price, that would require a 17% increase.
The trigger for such a move could include more good news from the company or increased evidence of a recovery in global aviation demand.
Having said that, Rolls-Royce shares have lost a lot of value in the past year and they could still move downwards from here. While the firm seems to be managing inflation for now, it remains a longer-term risk to profitability. A tightening economy might hurt demand for leisure travel, which could be bad news for new engine orders.
As I already own quite a few Rolls-Royce shares, I will not buy any more for now but will hold my position. Hopefully the share price will maintain its recent run of growth!
The post With the Rolls-Royce share price moving up fast, will it hit £1? appeared first on The Motley Fool UK.
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.
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
- Why the Rolls-Royce dividend forecast is a buying signal for me
- Rolls-Royce shares leap 28% from their low. What next?
- Could a New Cold War drive the Rolls-Royce share price higher?
- Earnings preview: can Rolls-Royce shares recover?
- Rolls-Royce’s share price is soaring! Time to pile in?
C Ruane has positions in Rolls-Royce. 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.