The Rolls-Royce (LSE: RR) share price has performed poorly over the past few months. Year-to-date, the stock has returned just 3.7%. Over the past 12 months, it is off nearly 10%.
However, over the same time frame, the company’s underlying fundamental performance has improved markedly.
So, what is really happening to the Rolls-Royce share price? Why are investors still giving the stock the cold shoulder despite its improving fundamentals?
Rolls-Royce share price outlook
Two weeks ago, Rolls-Royce issued a trading update for the first few months of 2021. The market had been expecting another update from the business following a rough performance from the company in 2020.
Towards the end of last year, management had stated that the company was on track to become free cash flow positive by the second half of 2021.
Investors were waiting to see if the company still believed this was possible. As it turns out, management believes it is.
According to the company’s latest trading update, management sees it reaching this goal as vaccinations bring the pandemic under control and travellers return to the skies.
This is incredibly positive news. The Rolls-Royce share price has been under pressure for much of the past year due to concerns about the company’s balance sheet and rising losses.
The fact that management believes the group will be free cash flow positive at some point in the next six-to-nine months suggests these balance sheet pressures are now behind it. If the company meets its cash flow target, it can focus on growth, but this could be a long way off yet.
Risks and challenges
Unfortunately, the company is not out of the woods yet, despite the progress it has made over the past few months.
Vaccinations are making a big impact, but outbreaks are still occurring around the world.
It could be several years before the group returns to 2019 levels of sales and profitability. In the meantime, management will have to remain laser-focused on keeping costs low and maximising profitability.
Another significant coronavirus outbreak could cause massive disruption. This would undoubtedly throw a spanner in the works of the company’s recovery plans. It may even have to raise more cash from investors if losses return.
I think this is the primary reason why the Rolls-Royce share price has performed the way it has in 2021. Yes, the company seems to be through the worst of the storm, but it still faces a long road to recovery. And any setback could force the business to make some hard choices.
With that being the case, I’m not going to be buying a large holding in Rolls-Royce any time soon. I might be tempted to take a small position, but considering the risks facing the enterprise, I reckon there are better opportunities on the market that would prevent me spending a lot on RR shares.
