Earlier this week I wrote about a couple of stocks that I think could really benefit from the relaxation of lockdown here in the UK. As well as those ‘reopening stocks’, I think there are plenty of others that fit into this category. Rolls-Royce (LSE:RR) is one.
The Rolls-Royce share price has been on a roller-coaster ride over the past couple of years. In the past year the share price is down 12%. But a more realistic picture is to look at the two-year performance that takes into account the stock market crash. Over this period, the Rolls-Royce share price is down 68%. So can it win back some ground in the reopening economy?
Start the engines
One reason I think that it can is due to commercial aviation. This comes under the civil aerospace division at the company, which makes up 41% of revenue of the overall business. It manufactures and services engines for aircrafts, an area that hasn’t been in high demand over the past year.
Lockdowns have meant that existing planes have spent a lot of time gathering dust, and the need to manufacture new engines has fallen. A £2.6bn loss from the division in 2020 was one of the main reasons why the Rolls-Royce share price has struggled to make gains.
Yet with a reopening economy, this could change. I do understand that a risk here is that an open domestic economy doesn’t automatically mean an open global economy. So we might see the UK open for business, but the ability to fly could still be restricted. Another potential risk here is that the reopening of travel may come too late for peak summer demand. In this case, lower flying hours would see less need for engine maintenance.
In my opinion, this is unlikely to be the case for long though. So I do see this as a valid case for the Rolls-Royce share price rising in the second half of the year.
A robust defence division
Another way the reopening economy could be good for business is due to the allocation of government spending. Rolls-Royce does a lot of business with the public sector through its defence division. The US and UK public sector account for 75% of revenue in this division.
In a trading update, it said the expectation is for UK defence spending to remain robust in coming years (around $50bn annually, Rolls-Royce said). However, I think that this is conservative due to the high allocation of public funds that have been allocated to Covid-19.
With a stronger economy into 2022 and beyond, this could see initiatives such as the furlough scheme being dropped. This could then see departments such as the MoD being given a higher budget. Or it could simply be that the focus can turn away from reactive Covid-19 measures to a more proactive focus on defence.
A stronger Rolls-Royce share price?
I think a reopening economy is good news for the Rolls-Royce share price, so I’m considering buying the shares. The extent of the benefit I think will be measured as to how much the easing of lockdown is just UK-centric versus the whole world. For that, only time will tell.
