It’s been a bit of a bumpy ride for the Rolls-Royce (LSE:RR) share price lately. While the stock is up more than 50% over the last 12 months, the company has found itself in a bit of turmoil, following a seemingly promising half-year report. So, what’s going on? And is this a business I should be considering for my portfolio?
Promising start to the Rolls-Royce share price recovery
Looking at the latest earnings report published in August, Rolls-Royce looks like it’s back on track. As a reminder, the firm was heavily disrupted by the pandemic, as a large chunk of its revenues originate from providing maintenance and services to the aerospace industry. Obviously, the demand hasn’t exactly been high recently, given travel restrictions.
However, with the vaccine rollout progressing quickly, the operational disruptions for the entire sector are slowly alleviating. Consequently, Rolls managed to get itself back in the black, reporting an underlying profit of £307m versus a loss of £1.63bn a year ago.
The free cash flow of the firm is still in the red. But has significantly improved by £1.69bn. And with the ongoing corporate restructuring estimated to deliver a further £1bn in savings, it may soon become positive again as well. In the meantime, Rolls is using capital raised from various disposals to improve its liquidity position. And as it stands, none of its long-term debt is due to mature until 2024. That certainly provides a good amount of breathing room. So, seeing the Rolls-Royce share price start climbing back to pre-pandemic levels is not too surprising.
So, why is the stock wobbling now?
Dissension in the ranks
Despite the encouraging progress made, it seems not all shareholders are convinced the management team can deliver. Its second-largest investor, Causeway Capital, owns 7% of the business. Jonathan Eng, the firm’s portfolio manager, has called on Anita Frew, the new chair of Rolls-Royce, to establish a new board of directors.
Causeway Capital alone doesn’t have sufficient voting power to force such a decision. But if it can garner support from other large shareholders, the change could become a reality. Managerial changes can be a good sign. But there is never a guarantee that a new team would be able to deliver better results. This naturally adds uncertainty, likely explaining the recent tumble of the share price.
The bottom line
Personally, I’m not too concerned about the comments from Causeway Capital. Revenue growth may have stagnated for now. But margins are clearly heading in the right direction thanks to the efforts being made by the existing management team. Providing that it continues to deliver operational improvements, I think investor confidence in the current leadership will remain relatively strong.
Having said that, I’m still not interested in adding Rolls-Royce to my portfolio, even with its share price recovery potential. The reason being, I believe there are greater investment opportunities to be found elsewhere.
