It didn’t take long for the Rolls-Royce (LSE: RR) share price rally to run out of steam. The embattled FTSE 100 engineer sailed out of penny stock territory below £1 over mid-to-late summer and struck levels not seen since mid-March in the process.
But rising confidence in the plane engine builder has steadily eroded again as concerns over the economic recovery have grown. At 109p, Rolls-Royce’s share price is moving back towards penny stock territory and will likely keep sinking if macroeconomic data continues to disappoint.
Why Rolls-Royce’s share price might rocket!
Could this be a good time to buy Rolls-Royce shares however? There are several reasons why the FTSE 100 firm could prove a wise buy for UK share investors like me, including:
- Streamlining is progressing well. Rolls-Royce has been forced into extensive cost-cutting following the Covid-19 outbreak and the mass grounding of commercial aircraft. And, so far, the engineer has impressed on this front and it’s on course to realise cost savings above £1bn in 2021. Cost reduction was critical in helping Rolls-Royce flip back into the black and record profits of £114m in the first half.
- Balance sheet repairs roll on. As well as slashing expenses, Rolls-Royce has also made good progress in other areas to mend its balance sheet. The firm remains on course to hit its £2bn target for asset sales following the sale of Bergen Engines in August. Rolls-Royce’s share price could gain further short-term momentum if talks to offload ITP Aero to Bain Capital for €1.6bn finish with a sale.
- The fight against Covid-19 improves. A steady recovery in the travel industry will naturally be the biggest driver for a Rolls-Royce share price rebound. News on this front continues to progressively improve with major airlines all planning to hike flight capacity for the remainder of the year. Ryanair is even planning to return capacity to pre-pandemic levels as soon as October.
Why I’m being careful
That said, the risks to the airline industry getting back to full power again remain significant. Covid-19 infection rates are rising all over the globe again as the Delta variant runs riot. The threat of fresh lockdowns will rise even further should more virus mutations emerge.
This is particularly troubling given that Rolls-Royce still has a mountain of debt on its books. Net debt stood north of £5bn as of June. Further lockdowns would significantly affect Rolls-Royce’s ability to get this paid down, and possibly even force the company to the wall.
Besides, I don’t think the Rolls-Royce share price trades at a level that reflects these significant risks. The group is expected to break back into profit in 2022, following more losses this year. But Rolls-Royce still trades on a forward price-to-earnings (P/E) ratio of 24 times. This kind of elevated rating is a problem if the travel industry remains in trouble. I’d rather buy other UK shares today.
