One of the frustrating things for shareholders in Rolls-Royce (LSE: RR) in recent months has been its struggle to maintain altitude. The Rolls-Royce share price reached 127p in March. But since then it has moved markedly lower. Over the past year, it has lost 10% of its value.
So might the shares might fall beneath 100p?
Why has the Rolls-Royce share price been falling?
One of the points to consider is what has been exerting downward pressure on the aerospace giant’s share price lately.
The company is significantly exposed to air travel. The more hours planes with its engines installed fly, the greater its service revenue. Over the past couple of months, hopes of increased European travel have been dampened. I think that has affected the share price.
Reasons to be bullish
But I see some positive signs for the Rolls-Royce share price.
For example, the company said this month that performance so far this year has been in line with expectations across all of its business units. That lack of nasty surprises should help restore some investor confidence in Rolls-Royce.
The company has repeatedly said that it expects to turn free cash flow positive in the second half of this year. That would be big news, as lately it has been bleeding cash. If it is able to turn free cash flow positive, that will reassure investors about its liquidity.
Last year, a rights issue was heavily dilutive. If shareholders are more comfortable about liquidity growing due to free cash flow, it could be positive for the Rolls-Royce share price.
Will the shares fall below 100p?
Despite what I regard as positive developments, the Rolls-Royce share price has been drifting downwards lately.
If there are more reasons to doubt the speed and scale of European aviation recovery, I think that could easily push the shares below 100p. Any further delay to the free cash flow target would also hit the shares badly in my view.
So, I don’t think the shares will necessarily stay above 100p. I could certainly see them falling below that level again.
My move on the Rolls-Royce share price
But I think the longer-term outlook for the Rolls-Royce share price remains good.
Flying demand will come back, in my view – it’s just a matter of time. There are some promising signs outside Europe. Already in the US, for example, United Airlines has upgraded its second-quarter earnings forecast. Such improved demand should help Rolls-Royce.
I still think the Rolls-Royce share price could get to 150p or higher this year.
But I don’t like how sensitive the share price is to demand recovery in the aviation sector. It has no control over that so is effectively a hostage to fortune. For that reason, even though I do see potential upside, I’m not currently planning to buy Rolls-Royce shares.
