What’s going on with the Rolls-Royce share price?

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Rolls-Royce (LSE: RR) is in a funk. Again. The Rolls-Royce share price is trading at below 100p levels today after managing to hold up above these levels for much of the past month.

Much progress for Rolls-Royce

This is mystifying. The outlook for aviation is better now than it has been at any time in the past year. Supply and service of civil aircraft engines is Rolls-Royce’s biggest revenue source, so that is good news. Also, its other business segments are in a healthy place.

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And Rolls-Royce also has plans in place for the future. It is in the process of forming a partnership with Cavendish Nuclear, an engineering company, to facilitate the development of Rolls-Royce’s small nuclear power plants. In another bid to support clean energy, the company is also set to launch the fastest electric plane.

To me, these look like developments with great potential as we move towards a cleaner, greener future. Whether or not they add to the company’s bottom line remains to be seen, but for now that is tomorrow’s question.

Why the share price drop?

So why the drop in share price?

I think one glaring reason is that the pandemic continues. It is true that vaccinations are happening speedily. It is also true that the intensity of Covid-19 has declined. However, it is equally true that coronavirus cases are on the rise. And while we are all looking forward to ‘Freedom Day’ next week, there is also a possibility that restrictions may come back after the summer. The worst affected from this ongoing uncertainty, is of course the aviation sector.

It is no coincidence then, that Rolls-Royce is hardly the only aviation related stock to decline in the recent months. FTSE 100 airline giant International Consolidated Airlines Group and the FTSE 250 low-cost airline easyJet, are other casualties of this uncertainty.

With constant change in expectations, I can see why investors appear undecided about the Rolls-Royce share price. I had predicted as much, when I wrote about it in May. My takeaway was that its situation is volatile, and that is how it has stayed. Even though by last month, it was beginning to look like I might have been wrong.

What would I do now?

So what would I do about the Rolls-Royce stock now?

I think it is a wait and watch situation for now. Unlike airline stocks, I have been particularly cautious about Rolls-Royce because even pre-pandemic its financial performance left a lot to be desired. So even if all goes back to normal, there is limited confidence in the company’s performance. This will also translate into limited share price increases.

Instead, if I want to buy stocks in the aviation pack, I think the likes of easyJet are a better buy for me. As a low-cost airline its bounce back can be faster.

Why is Rolls-Royce back on the rise?

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Rolls-Royce Holdings PLC (LSE: RR) share price hits £104.98 per share on Tuesday (06 July 2021)

The company is optimistic that its engine issues will be fixed this year

Analysts are targeting the stock to climb to £113.67 in the coming year

Rolls-Royce has also deepened a partnership with Shell

Interested to trade Rolls-Royce shares? Open an account to start trading today.

Rolls-Royce stock price: What’s the latest?

British engineering company Rolls-Royce shares have rallied as much as 4% since the company said it would be able to fix its engine issues last Friday (02 July 2021).

Year-to-date, the London-listed RR stock is up 1.6%, after sliding 53% last year as the aviation and aerospace sectors were hit by the Covid-19 pandemic.

As of Tuesday, 10 out of 20 analysts recommended ‘hold’ on RR shares, six rated ‘sell’, while four said ‘buy’. Their average 12-month target price was £113.67, Bloomberg data showed. That implied a potential upside of 8.3% based on Monday’s closing price.

Over the past week, Vertical Research Partners recommended ‘hold’ with a £120 target, and Morgan Stanley gave an ‘equal weight/in-line’ rating while eyeing £106 per share.

Bloomberg Intelligence (BI) analysts wrote that Rolls-Royce’s £5 billion debt-and-equity raise buys the UK firm time to weather the pandemic, ‘as worsening credit metrics hang heavily over spreads’.

Learn how you can buy, sell and short Rolls-Royce shares here.

Rolls-Royce optimistic about engine matters

Last week, a Rolls-Royce executive said the company is hopeful that it can soon resolve its costly jet-engine issues, Bloomberg reported. The news boosted its shares by 4.1% across two days.

Final fixes to a string of glitches relating to the Trent 1000 turbine that powers Boeing Co’s 787 Dreamliner wide-body plane will likely be made in 2021, Rolls-Royce engineering and technology director Simon Burr told Bloomberg in an interview.

Issues with the engine have drained the group of huge sums, which will likely exceed £2 billion by 2023, and have affected Rolls-Royce’s relationships with major customers, according to Bloomberg.

‘After a difficult three or four years, I feel confident about the durability of the engines and the future,’ Burr said.

He added that the group is testing the high-pressure turbine blades, which were deteriorating more quickly than expected.

Jefferies analyst Sandy Morris, who has a ‘buy’ call and a £130 target on RR shares, noted that the downtime during the pandemic has given Rolls-Royce the capacity to test both the Trent 1000 and Trent XWB ‘far more intensively’. However, Morris believes ‘the real test will come when the engine fleet is working hard again’.

With travel curbs now easing, 60-70% of 787 Dreamliner jets are active, while around 90% of Airbus SE’s A350 airliners, which use the Trent XWB engine, are active, Jefferies estimated, adding that the full wide-body fleet could return to service by the middle of next year.

Meanwhile, BI analysts recently opined that the group ‘must focus on right-sizing its civil aviation business’ in order to preserve cash.

Separately, Rolls-Royce last week inked a memorandum of understanding with oil major Shell to develop sustainable aviation fuel (SAF).

The partnership is in line with both companies’ plans for net-zero emissions by 2050.

What’s your call on Rolls-Royce shares?

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Rolls-Royce shares are below 100p. Should I buy?

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Rolls-Royce (LSE: RR) shares have caught my eye as they’ve fallen below 100p. So far this year the stock has decreased by over 4% and is flat the past 12 months.

So should I buy now at the current level? Well, I’ve been bullish on the company for some time and I’d use this opportunity to snap up some shares.

Why have Rolls-Royce shares been falling?

A significant portion of Rolls-Royce’s revenue is derived from civil aerospace. This is where it delivers and services aircraft engines. So naturally, any negative news regarding travel restrictions is going to hit the stock.

The Delta coronavirus variant has been spreading across the UK and there are concerns that countries will start to to restrict travel for any visitors coming from here. This clearly doesn’t bode well for the travel industry and has cast doubts on when the sector will resume any kind of normality.

So just when I thought that sentiment towards travel was improving, investors are worried about the implications of rising Covid-19 cases in the UK. This uncertainty has hit Rolls-Royce shares.

The positives

I don’t think all is lost though. There are a few reasons why I’m bullish about the company.We have a new health secretary, Sajid Javid, right in the middle of another wave of rising Covid-19 cases. And yesterday, he confirmed that the UK remains on track for ‘Freedom Day’ on 19 July.

Also, the green list of countries that people can fly to has been expanded. This is encouraging news and I don’t think should be overlooked. While the number of coronavirus cases is increasing, I’m glad that the number of fatalities remains very small. The vaccines appear to be working and the continued rollout of the jabs should be positive for Rolls-Royce shares.

Of course there’s no guarantee Freedom Day will happen. A further rise in Covid-19 cases could result in its date being pushed back further. This would mean that the travel industry may experience another lost summer like last year. This would hit the engine maker’s revenue and could impact the share price negatively.

Story continues

Broker view

As I mentioned, I’m upbeat about Rolls-Royce shares. And investment bank Berenberg named the stock one of its ‘key picks’ in civil aerospace earlier this month.

In fact, the analysts argued that the deep restructuring should drive bigger operating margins within three to five years in comparison to pre-pandemic levels. If this does happen, it could mean that Rolls-Royce has emerged out the crisis in better shape. It kept its ‘Buy’ rating from Berenberg with an unchanged price target of 150p.

My view

I don’t expect it to be smooth sailing for Rolls-Royce, but I reckon there’s light at the end of the tunnel for the company. I agree with Berenberg that the cost-cutting will help and means that it’s operating from a low base. This should work in the firm’s favour and hence, I’d buy the stock.

The post Rolls-Royce shares are below 100p. Should I buy? appeared first on The Motley Fool UK.

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