Is the rising Rolls-Royce share price a buying opportunity?

After being decimated by the pandemic, the Rolls-Royce share price has been climbing. Dylan Hood assesses if it is still a solid buy for his portfolio.

| More on:

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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

When I last covered the RollsRoyce (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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Dylan Hood has no position in any shares mentioned above. The Motley Fool UK has recommended Croda International. 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.

More on Investing Articles

Investing Articles

5 growth stocks under £1 Fools believe will soar

Not all of these growth shares are penny stocks, since -- at the time of writing -- all their market…

Read more »

Investing Articles

Here’s how I’ve targeted a HUGE passive income with FTSE 100 shares

The FTSE 100 is home to scores of brilliant stocks for dividend investors to savour. Here's how I'm looking to…

Read more »

Investing Articles

Here’s the best-performing FTSE 100 stock of the last 10 years

Private equity firm 3i has outperformed the rest of the FTSE 100 over the last 10 years. And its big…

Read more »

Fans of Warren Buffett taking his photo
Investing Articles

Here’s why Warren Buffett is selling shares (and why I’m not)

Warren Buffett cited tax considerations as his reason for selling shares in Apple. But this isn’t something most UK investors…

Read more »

Investing Articles

What on earth is going on with the AstraZeneca share price?

The AstraZeneca share price has fallen 30% from its peak in August. Dr James Fox explains what’s going on with…

Read more »

Investing Articles

2 high-yield FTSE 100 shares I’d consider buying for passive income…and one I’d avoid

Some FTSE 100 stocks have eye-popping dividend yields. But will the passive income actually be dished out? Paul Summers takes…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

These 2 former stock market darlings are trying my patience! Time to sell?

Harvey Jones thought he was getting a bargain when he snapped up these too much-loved FTSE 100 dividend growth stocks.…

Read more »

Investing Articles

Here’s how I’d use £3,000 to target a second income that grows each year

Our writer explains the approach he'd take to trying to build a second income that gets bigger over time, by…

Read more »