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Will the Rolls-Royce share price keep climbing?

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The Rolls-Royce (LSE: RR) share price has been climbing steadily over the past few months.

Following this performance, year-to-date, the stock has increased in value by around 3%. Over the past six months, the performance is far more impressive.

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Since the end of September last year, the Rolls-Royce share price has increased in value by more than 130%. Unfortunately, the stock still has a long way to go to recover from its pandemic losses. Since the end of 2019, shares in the aerospace and defence contractor have lost around 56% of their value.

However, past performance should never be used as a guide to future potential. And with the outlook for the business improving, I’m starting to wonder if the Rolls-Royce share price can continue to push higher and claw back some of its pandemic losses over the next few weeks and months. 

Improving underlying trends

When the company reported its full-year 2020 results in the middle of March, management declared that the worst was behind the business. It seems they were on the money.

Since Rolls issued this statement, several large american airlines have announced they are boosting capacity for the rest of the year due to better-than-expected demand.

The top 12 US domestic carriers flew 46% fewer seats overall in 2020 than in 2019. This year, carriers are expected to fly just 10% fewer seats than they did in 2019. What’s more, at least two airlines are planning to increase seat capacity in July and August by 20% compared to 2019 levels.

The bulk of Rolls-Royce’s revenues come from service contracts connected to engine sales. These service contracts are linked to flying hours. So, the more time the company’s engines spend in the sky, the better.

Many large US carriers plan to ramp up flying in 2021, suggesting that Rolls is past the worst. The company doesn’t supply every aircraft engine globally, of course, but it makes up about a third of the market. 

Rolls-Royce share price: past the worst?

All of the above doesn’t mean the company’s recovery is guaranteed, but it does seem to suggest there’s a tailwind behind the business. Therefore, I would buy the stock for my portfolio today, as I think the recovery is only just getting started. 

That said, Rolls-Royce will have to overcome some significant challenges before its recovery is complete. The coronavirus pandemic is not over yet. In many regions around the world, international travel is still restricted. That could hold back growth.

At the same time, the organisation has a lot of borrowing. Management is trying to sell assets to pay down debt, but this process is taking a while. Some of the group’s planned sales have also sparked security concerns. For example, Norway recently blocked the sale of Rolls-Royce’s Bergen Engines arm for this very reason. 

These risks and threats could hold back the company’s recovery. However, on balance, I believe the stock looks attractive.

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Rupert Hargreaves 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.

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