It’s been a turbulent couple of years to be a shareholder in Rolls-Royce (LSE: RR). The FTSE 100 aerospace and defence outfit has faced choppy trading action, frequently gaining and relinquishing penny stock status since 2020. Just shy of 93p today, the Rolls-Royce share price is still well below where it was pre-pandemic.
To compound the pain, the company’s performance has gone into reverse this year after Rolls rewarded investors with a positive 10.5% return in 2021. Amid the volatility, are there signs of a nascent recovery or should I steer clear of Rolls-Royce shares for now? Let’s explore.
A wobbly start to the year
There’s been a fragile recovery in international travel demand following the relaxation of coronavirus travel restrictions in many countries. A healthy travel market is crucial for Rolls’ business. It generates over 41% of its total revenue from its Civil Aviation division.
There’s some news to cheer in the company’s latest trading statement. Rolls confirmed that large engine long-term service agreement flying hours for its Civil Aerospace division rose 42% in the first four months of 2022.
However, China’s ‘zero Covid’ policy makes a full recovery to pre-pandemic flying hours unlikely in the near future. Additionally, the chaos at UK airports and struggles for Rolls-Royce customers, such as IAG, point to a difficult future if Brits decide to opt for staycations this summer.
The company ended FY2021 with net debt levels of £5,157m following substantial losses the year before. Coupled with a lofty price-to-earnings ratio of just under 62, it’s unsurprising to me that a sustained recovery in the Rolls-Royce share price has yet to materialise.
Where next for the Rolls-Royce share price?
Rolls’ Defence arm looks in better shape. Due to the long-term nature of the firm’s defence contracts, Rolls states that it is “not immediately exposed to individual geopolitical events”. The company’s strong order backlog should help the company hit targets on revenue, profit and cash conversion. This should also allow Rolls to combat the macroeconomic risks of inflation and supply chain disruption.
Furthermore, the company cheered a “very strong” order intake for its Power Systems division over the first four months of 2022. These snippets of good news have contributed to the recent rise in the Rolls-Royce share price in my view. Shareholders will hope this continues.
However, I still have concerns about Rolls-Royce shares. The business oversaw nearly 9,000 job cuts (a fifth of the company’s workforce) as a result of the pandemic. While this may help the company’s streamlining efforts, Rolls still has to prove this won’t negatively impact the quality and efficiency of its production in the long run.
Would I buy?
Rolls-Royce shares have consistently underperformed the FTSE 100 index for years — and 2022 has been a poor year so far. There are some reasons to be optimistic and I believe brighter days may lie ahead for this iconic British brand. However, I’m yet to be convinced the company has done enough to prove it’s on a sustained path to recovery.
With concerning net debt levels and restrictions on Rolls-Royce dividend payments until 2023 at the earliest, I won’t be buying its shares at present.
