When I last covered the Rolls–Royce (LSE: RR) share price in July, it was struggling to break above the 100p barrier. The shares are now sitting 17% higher at 111p, bringing one-year returns to just under 50%. Having been decimated by the pandemic, it seems sentiment towards the aerospace giant may finally be improving. Still way off pre-pandemic levels, this stock could continue climbing – so is now the right time to buy in?
Ready for take-off
The Rolls-Royce pandemic recovery seems to be taking flight. The 2021 half-year results backed up this view. Underlying operating profit reached £307m, contrasting with a £1.6bn loss in the same period for 2020. The company is still operating with a negative cash flow, but the figure has been reduced by over £1.5bn compared to 2020 H1. These metrics give me confidence that the Rolls-Royce share price can continue to pick up.
The business has also emerged from the pandemic as a much more streamlined entity. The firm was forced to cut 7,000 jobs in 2020 due to a $4bn crippling loss. A further 2,000 jobs were announced to be cut in 2021 and Rolls said this process is now 90% complete. These cuts should help strengthen the firm’s liquidity position and rebuild the balance sheet, with it targeting £2bn free cash flow for the year.
The firm also announced the appointment of Anita Frew as a non-executive director. Frew will also be replacing Sir Ian Davis as chairperson in October. Frew is the current chair of chemicals company Croda International, which has seen huge success over the last five years. New management, coupled with a streamlined balance sheet, could be a recipe for success over the coming years. If this is the case, I expect we could see the Rolls-Royce share price reach its pre-pandemic levels once again, or even push higher.
Rolls-Royce share price risks
Good news aside, there are still risks moving forward for Rolls. One risk I am aware of is the rising threat of inflation. The Bank of England has warned that inflation may creep to 4% as the economy fully reopens and people begin spending normally again. If this is the case, it opens the door to increasing interest rates. This is very bad news for a company that currently has £4bn debt.
In addition to this, it is still going to be some time before flight numbers are back to normal levels. Analysts at McKinsey estimate the aviation sector won’t reach pre-pandemic levels until 2024. As Rolls makes the bulk of its money servicing jet engines, this may place a lid on business. In turn, this may also halt the Rolls-Royce share price growth.
Overall, I think the coming months may still prove shaky for Rolls. That being said, I do like the long-term outlook for the firm. I will be placing this stock on my watchlist.
