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Is the Rolls-Royce share price finally on the road to recovery?

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

After treading water for much of the past year, the Rolls-Royce (LSE: RR) share price has taken off over the past two weeks. Since the middle of September, the stock’s up by more than a third, taking its gains over the past 12 months to nearly 200%.

However, this figure’s a bit misleading because it encompasses the end of September and the beginning of October last year. That’s when the stock dropped to its lowest level since the early 2000s. 

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Since the beginning of January this year, the Rolls-Royce share price has returned just 40%. Investors have been buying the stock over the past few days as the company’s made some significant strides in its recovery. 

Confidence returns

After waiting the best part of a year for some good news, three developments occurred in the last week, substantially improving the group’s fortunes. 

First of all, Rolls-Royce finally sold its Spanish business ITP Aero for £1.5bn. Secondly, the firm inked a £1.9bn contract to supply parts for the US Air Force’s fleet of B-52 bombers. And third, it looks as if the government’s open to funding its project to build mini nuclear reactors. 

These positive developments came on top of an earlier announcement that the US would be reopening its borders to British and European travellers. 

The majority of Rolls’ sales come from maintenance contracts on the engines it’s already sold to aerospace clients. The more time these engines spend in the sky, the more maintenance they need. Therefore, the reopening of the transatlantic market is a significant positive development for the group.

Rolls-Royce share price outlook

Whenever I’ve covered the stock, I’ve always concluded its future’s too uncertain to recommend it as an investment. 

However, following all of the above developments, I think Rolls’ outlook has improved dramatically. Its balance sheet will benefit from the £1.5bn cash infusion from the Spanish business sale. Its revenues should increase greatly with new long-term contracts and the reopening of the transatlantic travel route. 

That’s not to say the group’s out of the woods entirely. It still faces some significant challenges. These include high and rising costs and weak demand for engines from the aviation industry. It could be years before the industry returns to 2019 levels of activity

Still, on the whole, I think the company is finally heading in the right direction after nearly two years of uncertainty. And with this being the case, I believe the Rolls-Royce share price is on the road to recovery. As the global aviation industry recovers, there could be further positive updates from the group over the next few quarters, and this may drive the share price higher. 

As such, I’ve changed my opinion of the stock. I’d happily buy this investment as a speculative holding for my portfolio. 

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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.

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