The Motley Fool

Is it time to act on the Rolls-Royce share price?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

A Rolls-Royce employee works on an engine
Image: Rolls-Royce

After a turbulent few months, the Rolls-Royce (LSE: RR) share price is back to where it started 2021. Over the past 12 months, the Rolls-Royce share price has increased 17%. But recently momentum has stalled.

Could that make now the time to act on the share price?

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

Short-term travel prospects

A key determinant of the Rolls-Royce share price is how much its installed engines are used. The more flying hours they log, the greater the servicing need. Such maintenance forms a significant part of the company’s revenues.

I think the prospects are looking up. With travel restrictions lifting in countries that are vaccinating quickly, flying schedules are filling up again. So far in Europe, the pace is slower. But in the US, for example, carriers such as American Airlines plan summer domestic schedules at close to 2019 levels. Larger planes usually reserved for long-haul international flights are being used to add capacity on domestic routes by American and rival Delta. That suggests many passengers are keen to fly again.

Rolls-Royce has said that large engine flying hours in the first four months of the year were around 40% of normal levels, in line with its assumptions.

Cash flow shift

The company has repeatedly said that it expects to stop bleeding cash in the second half of this year. With its massive outflow in the past year, positive cash flow will be a big step forward in boosting investor confidence. That could be good for the Rolls-Royce share price.

At its annual shareholders’ general meeting today, the company reiterated this target. It said: “We continue to expect to turn free cash flow positive at some point during the second half of 2021, as engine flying activity recovers and cost savings are delivered.”

The company recognised that the target remains dependent on recovery timing. But the positive note could still bode well for the shares. With the second half starting barely a month-and-a-half from now, this target remaining in place suggests management confidence.

Defence and power

The company does more than just make and service civil aircraft engines.

The company described its power systems division performance so far this year as “on track” in its trading update. Additionally, the company said that its defence division has performed “resiliently”.

As investors become more comfortable about the outlook for civil engines, I expect them to focus more on the other divisions again. Given their comparatively stronger performance, that could lead to a positive re-rating for the shares.

Rolls-Royce share price risks

The timing of the recovery in flying hours remains critical to Rolls-Royce, so the longer it takes the bigger the risks to the company. That is outside the company’s control.

With a large fixed cost base, reduced flying hours don’t just hurt revenue, they also significantly cut profits.

What I’ll do about the share price

I see positive tailwinds for the company. The recent price fall could therefore make it more attractive for me to add Rolls-Royce to my portfolio.

However, I remain wary of the risks. The company continues to experience cash outflow. The pace of travel recovery remains hard to ascertain. For now at least, I will continue to watch the company from the sidelines without investing in it.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

christopherruane 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.