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The Rolls-Royce share price was the top riser on the FTSE 100 yesterday. Here’s why

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A Rolls-Royce employee works on an engine
Image: Rolls-Royce

The Rolls-Royce (LSE: RR) share price was the top FTSE 100 riser yesterday, gaining 10% to close at 146p. And while it hit a low of 39p in October last year, it’s since risen nearly 275% to the present level. Yes, it’s still a long way off its 1,159p high of December 2019. But I think there’s a strong possibility it could be heading that way.

US Air Force contract

Yesterday, Rolls-Royce won a new $2.6bn contract to supply and maintain engines for the US Air Force. After a “vigorous multi-year competition,” 650 Rolls-Royce F-130 engines will now be used in the B-52 Stratofortress fleet. CEO Tom Bell said that it will “power its missions for the next 30 years.” The cash injection is obviously welcome. But I think the bigger story is that the US government has given Rolls-Royce a strong vote of confidence.

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The company’s £2bn disposal program is also going well. It’s signed a deal with private equity firm Bain Capital, which will see Bain take control of ITP Aero in a deal worth €1.7bn early next year. And it’s just sold its 23% stake in Airtanker for £189m. 

I think there’s a good chance that Rolls-Royce will see free cash flow turn positive by the end of the year. And management is expecting to generate profits again in 2022. Now could be the perfect time for me take advantage of the low Rolls-Royce share price.

The wider picture

In recent half-year results, CEO Warren East said that the “leaner cost base together with a strong liquidity position gives us confidence in our ability to withstand uncertainties around the pace of recovery in international travel.” And I think as global travel restrictions continue to ease, consumers who have built up savings during the pandemic could choose to spend them abroad.

This would be good news for the company. More planes in the sky means that more maintenance will be needed, leading to increased revenue. And while individual airlines like easyJet, Ryanair, or IAG might get into trouble, Rolls-Royce relies on the aviation sector as a whole. So it has a stronger immunity to risk. 

And looking to the future of the Rolls-Royce share price, the company knows that climate change is rising on the political agenda. So it’s pouring funding into developing low-carbon technology. Its revolutionary Ultrafan engine’s power gearbox just broke the aerospace world record. This is impressive as it’s also designed to be 25% more efficient than standard engines.  

And it’s joined the ‘UN Race to Zero’ and ‘UN Business Ambition for 1.5°C’ campaigns. This means that it plans to be a net zero carbon company by 2050. I think its green ambitions are going to be expensive. But it’s good to see a future-proofing plan. 

Risks for the Rolls-Royce share price

Flight traffic is still below its pre-pandemic level. And the coronavirus situation could easily deteriorate again. Ongoing tax rises combined with inflation are also going to put pressure on leisure spending. Meanwhile, increased home working is likely to lead to reduced business travel going forward. 

There’s also the ongoing raw material price increases, supply, and labour shortages that could all hit the stock. But at 146p, the Rolls-Royce share price remains great value for my portfolio.

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Charles Archer 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.

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