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Where might the Rolls-Royce share price go in October?

Inside the Rolls Royce Trent 800 Engine, this engine is designed for Boeing 777 aircraft.

Rolls-Royce (LSE: RR) has shared some good news recently, unveiling a new contract with the US Air Force. That gave the Rolls-Royce share price a boost and, since mid-September, it’s up 37%. Over 12 months we’re looking at a more modest 30% gain. But over two years, covering the whole of the pandemic, Rolls shares are still down 43%.

Where will things go in October? I don’t think one month really makes any difference in the long term. But I have a few thoughts on bullish and bearish factors that I suspect could move the shares.

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First, that new contract, to refit the USAF’s fleet of B-52 Stratofortress bombers. Worth up to $2.6bn (£1.9bn), it edges out Raytheon, the previous supplier of Pratt & Whitney engines, and should keep the planes flying until 2050. As well as the financial benefit of the deal itself, I like seeing such a major customer showing confidence in Rolls-Royce’s long-term future.

Asset disposals

Asset disposals and cost saving measures are coming along well, and the company is starting to look a good bit leaner and healthier. I was particularly happy to see the sale of ITP Aero for approximately €1.7bn to Bain Capital, even against local Spanish political opposition. I think that was a key milestone.

The two factors together represent a bit of a move away from civil aviation, hit hardest by Covid-19, towards the more resilient defence sector. That’s got to be good for Rolls-Royce share price sentiment, both for the long term and in the coming weeks.

I reckon some of the bullish factors that apply to International Consolidated Airlines should help bolster Rolls-Royce too. In particular, the relaxation of both UK and US aviation restrictions should help. That’s assuming nothing goes wrong and there’s no reversal in October, of course.

Rolls-Royce share price downside?

What might put the brakes on the Rolls-Royce share price? The company has been working towards a challenging set of milestones during the downturn. Fellow Motley Fool writer G A Chester has outlined them recently, so I won’t repeat them here. Progress has been going well. But we know what can happen when a company misses just one target. The share price can tank again, even if everything else looks good.

Of the targets, those involving liquidity and cash flow are the most critical, in my opinion. And as my colleague has pointed out, Rolls has already pushed back its free cash flow target, though it does expect to at least turn the measure positive by the end of 2021.

There is one thing that should mitigate any possible target misses, and that’s the timescale. They’re mostly set in 2022, or at least the end of 2021. So on that score, October might be safe. But I’ll still watch out for any hints of weakness.

Valuation

The other big thing that might spoil the Rolls-Royce share price party is the valuation itself. Have investors pushed the price up too far, too soon? Is there a sufficient safety margin for investors taking the risk of buying today?

I’ve always liked Rolls-Royce, and I still think I might buy some one day. But my uncertainties surrounding valuation mean it won’t be today. Even if October turns out well, as I suspect it will.

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Alan Oscroft 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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