Although the long-term downtrend in the Rolls-Royce (LSE:RR) share price is still happening, the stock has enjoyed a 22% bounce in the past month. I can see a few factors contributing to this. As an investor with a time horizon spanning the next few years, I want to try and assess whether this is the start of a much larger rally, or simply another jump in Rolls-Royce shares that will fizzle out.
Reasons for the jump
One factor that has definitely helped was the upbeat trading update released at the start of the month. Even though it didn’t contain any new information that surprised me in a good way, it importantly didn’t reveal any fresh disappointing news. Unfortunately, since the pandemic hit, most reports have contained such disappointing surprises!
We got confirmation that the £2bn proceeds from asset disposals (including the sale of ITP Aero) have now been used to pay off some of the large debt pile the business has. Even though this was always the plan, I’m happy it has been processed. It shows investors that the strategy is to reduce debt to a much more reasonable level.
Rolls-Royce shares have also benefited from better investor sentiment in the past few weeks. With the FTSE 100 up over 400 points in the past month, growth stocks such as Rolls-Royce have led the charge higher. Better confidence has come from Ukraine making progress against Russia, along with lower-than-expected US inflation.
The long-term picture for the shares
The stock is still down 39.4% over the past year, despite the recent jump. As I flagged up last month, I really want to see growth in other divisions aside from Civil Aerospace. The business noted that large engine flying hours continued to recover in the four months covered in the trading update. But they’re still only at 65% of 2019 levels.
I just don’t see Civil Aerospace being the main driver of future growth for the company. Given the cost-cutting and trimming down of this part of the business, I want to see another area (such as Defence) really start to outperform.
The New Markets division does excite me, particularly the focus on clean aviation projects. Yet this area is too small to make a financial impact on the overall group. Therefore, I don’t see this influencing Rolls-Royce shares anytime soon.
Even though I don’t see this stock rally continuing for the moment, I could be wrong. The fact is that net debt is coming down and this could encourage some investors to buy the stock. With a renewed focus on defence from governments around the world, the business could also pick up some lucrative contracts.
News in this regard could add to the share price jump. Yet in order to see the price jump to 100p or even back to the year high of 142p, I think the business fundamentally has to have changed. I don’t think we’re there yet, so will keep my powder dry.
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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.