The Rolls-Royce (LSE: RR) share price has jumped higher over the past few weeks. From around 40p per share at the beginning of October, the stock is now changing hands at about 95p, a gain of approximately 140% in just a few weeks.
Following this performance, I’ve decided to take a closer look at the stock as I consider adding it to my portfolio.
Rolls-Royce share price performance
Before I buy shares in any enterprise, I always try to understand why the stock has performed in the way it has. In other words, I want to know what’s going on with the business.
When it comes to Rolls-Royce, it seems to me there are two reasons why the stock has outperformed the market over the past few weeks.
First off, the company has launched a massive recapitalisation plan, which has strengthened its balance sheet and removed any risk of near-term bankruptcy. I think this development dramatically improved investor sentiment towards Rolls-Royce’s share price.
Second, the news of a potential coronavirus vaccine suggests the end of the pandemic is in sight. For a company that relies on the airline industry for the bulk of its revenues, this is excellent news.
However, we’re not out of the woods just yet. The most optimistic forecasts suggest there will be no global vaccination programme until the first half of 2021. That implies Rolls-Royce faces several more months and uncertainty. Even if a vaccine is rolled out over the next six months, it could potentially be years before air travel demand returns to 2019 levels.
Mixed outlook
Considering all of the above, I think the outlook for the Rolls-Royce share price is highly uncertain. The worst seems to be behind the business, although there’s no clear path for the firm to return to growth.
And that’s what worries me. It could be years before the firm’s bottom line returns to the black, which makes it almost impossible to value the business at current levels.
Still, I reckon in the long run the company will be able to pull itself out of its current predicament. After all, Rolls-Royce is one of the world’s largest producers of engines for commercial airlines. Its experience and know-how in this industry is almost unrivalled, and that’s unlikely to change any time soon. I think this competitive advantage will almost certainly help the business in its recovery over the next five years or so.
Nevertheless, despite that potential, I think it could be many years before the company is in a position where it will be able to return cash to investors. That tells me the potential for returns from this stock in the medium term is low.
As such, I’m not a buyer of the share price after its recent performance. I think there are other opportunities out there that could offer more profit potential with less risk.
