The Rolls-Royce (LSE: RR) share price has been dead money for the past 10 months. Since the beginning of December last year, the stock’s gained just 2%.
I’m using these figures because, in October 2020, Rolls was on the verge of running out of money and its stock price dropped to the lowest level since the early 2000s.
Since then, over the past 12 months, shares in the company have added nearly 100%, but this was from a very low base. The corporation is in a much stronger position today than it was towards the end of last year. Therefore, I think it would be misleading to compare the current share price to that of October 2020.
But even though the company has pulled itself back from the brink and is expecting to start generating cash again next year, the market’s still avoiding the Rolls-Royce share price. Could this be an opportunity for long term investors?
The future performance of the Rolls-Royce share price very much depends on what’s next for the enterprise. Management has stemmed the bleeding. The balance sheet has been strengthened. Costs have been cut. As such, the enterprise is in a vastly stronger position than it was this time last year.
However, analysts are warning that the aviation industry could take years to recover to 2019 levels. This will significantly impact the group, although there are some green shoots in the market.
At the beginning of September, aircraft manufacturer Boeing registered 30 order cancellations and 53 new orders, the seventh straight month in which the company’s order book has grown.
This is important because Rolls generates the vast majority of its revenues from service contracts linked to engine sales. The more planes there are in the sky, the higher the company’s revenue potential.
Flying hours also matter. The longer an engine spends in the sky, the more maintenance it needs. More maintenance means more revenue for Rolls.
In most markets, aircraft are spending more time in the sky, but schedules are nowhere near as busy as they were in 2019.
Rolls-Royce share price outlook
What does all of the above mean for Rolls? It looks as if the company’s outlook is improving. However, I think the market needs to see some cold hard profits and positive cash flow from the business before buying back into this turnaround story.
Management’s expecting the group to report a positive cash flow next year. So we will have to wait and see what the future holds. In the meantime, I think the market will continue to avoid the business, at least until there is more clarity on the state of the global aviation industry.
Personally, I also plan to avoid the Rolls-Royce share price in the near term. I think there’s too much uncertainty to invest right now.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.