The Rolls-Royce (LSE: RR) share price has faced a turbulent past couple of years. Indeed, due to the pandemic, and the fact that it was forced to issue more shares to stay afloat, the share price sank to around 30p in October 2020. But it has managed to stage a recovery recently, rising over 100p. With takeover rumours, and the return of flying, is the Rolls-Royce share price about to soar?
Takeover rumours
Last week, there was a blog post on financial news site Betaville, that Rolls-Royce may be involved in a “significant corporate transaction, such as a merger or even takeover offer for the business itself”. Takeover talk nearly always has a positive effect on a company’s share price, as acquisitions tend to come with a price premium. Understandably, the Rolls-Royce share price has gained some momentum since this news was announced.
Even so, I have doubts about this piece of information. In fact, the British government have a golden share in Rolls-Royce, meaning that it can veto any potential deals. As Rolls-Royce is heavily involved in the defence industry, I believe it’s unlikely that the government will allow a bid for the whole company, especially from a foreign bidder. The only possible candidate that may be permitted to launch a bid is BAE Systems. This is because the government also holds a golden share in that company. But this doesn’t seem part of BAE’s current strategy, and for these reasons, a takeover of Rolls-Royce seems unlikely to me.
Therefore, I will not be buying Rolls-Royce based on speculative takeover news, as I think that there is very little chance anything will come to fruition. Besides that, I prefer to buy stocks for the long term rather than in the hope of a fast turnaround.
Other factors
So how appealing is it as a longer-term investment? Rolls-Royce released its full-year 2021 results last month, and there were a number of very promising signs. For example, it managed to report a statutory profit of £124m, in comparison to a statutory loss of over £3bn last year. Thanks to restructuring efforts, it has also managed to save more than £1.3bn. This showed signs that the firm was recovering during 2021. There’s hope that a further recovery will be achievable throughout 2022.
This would be helped by the pent-up demand for foreign travel this year, and airline operator IAG expects its capacity will be around 85% of 2019 levels this year. As such, Rolls-Royce should benefit from the increased demand, as its revenues are dependent on flying hours.
There was a slight negative, because it was announced that the CEO, Warren East, is set to resign. This may add some uncertainty for the group and strain the Rolls-Royce share price.
Will the Rolls-Royce share price soar soon?
I think the Rolls-Royce share price is too cheap, especially as it has managed to reach profitability. This cannot be said for most other companies in the travel industry. As such, despite the multitude of risks, I’m very tempted to buy, as I feel there’s a large amount of upside potential. With travel reopening at speed, I feel that the next few months could be particularly positive for the Rolls-Royce share price and there is certainly the possibility that it could soar very soon.
