The Rolls-Royce (LSE: RR) share price is around 91p as I write. But it’s been slipping since late June and today’s weakness extends the move. For context, the price knocked on the door of 130p as recently as mid-March. And a year ago it was around 89p.
The outlook drives the Rolls-Royce share price
Of course, price alone doesn’t tell the whole story. The Covid-19 pandemic caused massive upheavals in the operations of the business and threatened the company’s very survival. And mitigating actions taken by the directors included a large refinancing and restructuring programme. The past 18 months or so have been painful for the company and its shareholders.
But, to me, the weak share price today looks like it’s down to one thing — the resurgence of Covid-19. Even the UK government has changed its tune regarding so-called ‘freedom day’ due on 19 July in England. To my ears, the government’s messaging now urges far more caution than it did earlier.
So investors are probably right to be wary about reopening stocks right now. For example, I heard Boris Johnson say no action is being ruled out to fight the pandemic by the UK government. If restrictions do end up returning, full business recovery for Rolls-Royce and other companies could move further away.
Waiting for a recovery in engine flying hours
Other stocks are suffering as well. Although that’s no consolation for Rolls-Royce shareholders. But weak shares include names such as Stagecoach, Go-Ahead, International Consolidated Airlines, and Saga among many more.
However, the longer-term outlook for the Rolls-Royce business looks quite promising. Much of the firm’s trade relies on planes being in the air to generate engine sales and demand for maintenance. And on 13 May the company said engine flying hours were 40% of 2019 levels in the first four months of 2021.
That outcome was driven by cargo flights and key routes remaining open. But Rolls-Royce needs a return to big-scale airline passenger traffic to make a significant difference to the business. And that outcome is very much dependant on what happens next with the pandemic. But the directors pointed to the rollout of vaccination programmes and increased testing as encouraging signs.
Meanwhile, the outlook for the firm’s Power Systems and Defence operations is positive. Those areas have been less affected by the pandemic and are recovering well from the setback.
Expectations for positive cash flow
In May the directors thought the business would “turn free cash flow positive at some point during the second half of 2021.” However, they also said their guidance depends on the timing of the recovery in engine flying hours.
It seems rational for the Rolls-Royce share price to drift lower as cases of Covid-19 climb. But at some point, surely, life will resume without restrictions. Meanwhile, should I buy the stock?
It’s very hard to put a value on Rolls-Royce. The extent of the eventual recovery in engine flying hours is unknown. So, I’m assuming the stock market is correct with its assessment of the company’s immediate prospects and that the share price is where it should be. So, for the time being, I’m avoiding this one.
However, I could be wrong in my assessment and the stock could rise fast if news improves regarding Covid-19 infection rates. We’ll hear more from Rolls-Royce with an update scheduled for 5 August.
