The Rolls-Royce (LSE: RR) share price plummeted during the stock market crash of March 2020 and continued falling. It fell from over 230p to an 18-year low of just 38p in October 2020. Since then, the shares have struggled to gain momentum, hovering around the 100p mark for much of 2021. However, over the past 30 days, the Rolls-Royce share price has found new momentum, rising 35%. Let’s take a closer look at the reasons behind this rise, whether this trajectory might continue and whether it’s a buy for my portfolio.
A key reason for the recent price rise is news of Rolls’ sale of its Spanish business ITP Aero. The sale of the subsidiary to Bain Capital Private Equity will raise approximately €1.7bn. This transaction has been described as a “key element” of the firm’s disposal plan to help rebuild the balance sheet in the wake of the pandemic. Not only does this add cash, but it’s also a key part of rebuilding Rolls’ credit profile. This will allow the firm to borrow money more easily down the line. Both these factors are great news and help explain that rise in the Rolls-Royce share price.
Another key element is news that Rolls won a potential 17-year contract with the US Air Force to provide F130 engines. The contract has a base period of six years, worth approximately $500m. This guarantees future business, meaning a steady inflow of cash. A key problem Rolls has faced in the aftermath of the pandemic is problems with its balance sheet. It needs business like this to ensure its future.
Additionally, the travel industry is beginning to operate nearer pre-pandemic levels. More flights mean more engines will need to be serviced by the firm. This will also help repair the balance sheet and drive up the Rolls-Royce share price.
Risks moving forward
While the above factors point towards a stronger financial position for Rolls, the balance sheet remains damaged, and the company still holds a large amount of debt.
The 2021 half-year results showed the company had over £3bn debt as of 30 June 2021. Inflation has been creeping up due to Covid-related government fiscal stimulus. As inflation rises, we’re more likely to see the Bank of England raising interest rates. If this happens, Rolls could be in a sticky position due to its debt pile.
In addition to this, there are still worries that the travel industry may not recover as quickly as hoped. Analysts at McKinsey don’t expect the industry to operate at full capacity until 2024. If so, it would place a lid on Rolls’ recovery.
Can the Rolls-Royce share price keep rising?
The shares may have risen 35% in the past 30 days, but I won’t be rush to buy any shares for my portfolio just yet. I do think the Rolls-Royce share price could push higher in the future, however, after such big movements, corrections often follow.
For now, I will be keeping a keen eye on the company’s results as it continues to rebuild its balance sheet. If positive news keeps coming, I would expect the Rolls-Royce share price to keep creeping up. But I’ll only buy when I see the recovery on much firmer ground.
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Dylan Hood 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.