Can the Rolls-Royce share price take off again?

With cash flows being restored, can the Rolls-Royce share price make a comeback? Or is there a bigger threat on the horizon?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

A pastel colored growing graph with rising rocket.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

Key Points

  • The Rolls-Royce share price has dropped by 30% since the start of 2022 as investor sentiment becomes bleaker
  • Looming order cancellations for Trent 7000 engines could significantly impact its aerospace division revenue stream
  • Corporate restructuring combined with promising performance from other divisions could push free cash flow back into the black by the end of 2022

2022 continues to be a rough year for Rolls-Royce (LSE:RR) and its share price. Despite the travel sector making solid recovery progress from the pandemic, the stock is down by over 30% year-to-date.

There seems to be growing scepticism surrounding its long-term prospects. But are these fears justified? Or is this actually a buying opportunity for my portfolio? Let’s take a closer look

What’s behind the falling Rolls-Royce share price?

With the bulk of its revenue originating from aerospace engine sales and maintenance, Covid-19 unsurprisingly punched the income stream in the face. Today, the situation has improved. And with flight volumes on the rise, demand for the firm’s services is following suit. So why isn’t the Roll-Royce share price climbing alongside these figures?

There are undoubtedly numerous factors at play. But the primary concern continues to surround the engineering group’s aerospace division. According to the latest investor presentation, Rolls-Royce’s order backlog currently stands at an impressive £50.6bn. And a good chunk of that comes from aircraft engine orders.

As of the end of March, the company had 1,532 of its Trent engines on the order book. Considering these propulsion systems have multi-million-pound price tags, that’s a lot of money.

Unfortunately, reports have emerged that AirAsia X has cancelled 63 A330neo aircraft orders with Airbus, due to financial problems. What does this have to do with Rolls-Royce? The A330neo is powered by two Trent 7000 engines. And if Airbus cannot find a new buyer, up to 126 engine order cancellations could be heading in Rolls-Royce’s direction.

Combining this new threat with existing concerns about the Ukrainian war, the sudden resignation of CEO Warren East, and rising interest rates, I’m not surprised to see the Rolls-Royce share price continue its descent.

There is a silver lining

As horrendous as all this sounds, there are some valid reasons to be optimistic. Firstly, following a rigorous restructuring of the business, the firm’s balance sheet has seen some major improvement.

There are still plenty of cracks to repair. And the net debt, including lease agreements, stands at a whopping £5.2bn. However, with £2bn of capital set to arrive courtesy of its announced non-core asset disposals, this financial position is expected to improve significantly.

Disposals are obviously a non-repeatable source of income and can take time to complete. Fortunately for Rolls-Royce and its share price, none of its loan maturities are due before 2024. That gives management two years to get cash flows back on track to cover the interest expenses of the remaining balance.

Will this happen? Only time will tell. But current managerial guidance indicates the group’s free cash flow will return to the black by the end of 2022. Needless to say, that would be excellent news for the Rolls-Royce share price.

Time to buy?

Despite what its share price would indicate, this business seems to be making solid progress in its recovery. The potentially looming order cancellations are concerning. But with plenty of other revenue avenues to explore, this appears to be a short-term hurdle rather than a long-term catastrophe.

So can the Rolls-Royce share price take off again? I certainly believe so. Having said that, I’m not tempted to add any shares to my portfolio simply because I think there are better investment opportunities elsewhere.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Zaven Boyrazian 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.

More on Investing Articles

A senior man and his wife holding hands walking up a hill on a footpath looking away from the camera at the view. The fishing village of Polperro is behind them.
Investing Articles

3 shares that could help a SIPP double in value

Christopher Ruane discusses a trio of FTSE 100 shares that he thinks investors should consider for their long-term potential to…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

I’ve doubled my money on this growth stock but I’m not selling it any time soon

Uber has been a great investment for Edward Sheldon, rising more than 100% in just two years. He believes the…

Read more »

British union jack flag and Parliament house at city of Westminster in the background
Investing Articles

The FTSE 100 is on fire! Yet these 2 stocks still look cheap to me

Despite the FTSE 100 hitting record highs, there’s no shortage of undervalued opportunities across the index, says Ben McPoland.

Read more »

Female student sitting at the steps and using laptop
Investing Articles

Greggs shares: an outstanding bargain after crashing nearly 40%?

Shares of one-time market darling Greggs have been in foul form recently. But is this a once-in-a-blue-moon opportunity for our…

Read more »

Close-up of children holding a planet at the beach
Investing Articles

This FTSE 100 stock’s suddenly become the highest-yielder on the index!

The league table of FTSE 100 (INDEXFTSE:UKX) dividend stocks has a new number one. But our writer explains why there…

Read more »

Rear View Of Woman Holding Man Hand during travel in cappadocia
Investing Articles

Is this under-the-radar UK stock as cheap as its rooms?

Our writer’s been keeping an eye on a little-known UK stock that operates in a niche, but profitable, sector of…

Read more »

Young Caucasian woman holding up four fingers
Investing Articles

It’s a ‘Fabulous Friday’ for holders of these FTSE 100 shares!

Four members of the FTSE 100 (INDEXFTSE:UKX) are making their latest dividend payments today (11 July). Our writer takes a…

Read more »

Man riding the bus alone
Investing Articles

Check out this spectacular FTSE 250 stock

UK investors willing to look beyond the FTSE 100 can find some outstanding companies. Online advertising business Baltic Classifieds might…

Read more »