Rolls-Royce (LSE:RR) is a FTSE 100 jet engine producer and manufacturer of power systems. Airlines are once again taking flight, powered by the company’s engines. There is also the possibility of increased government defence spending ahead. So, should I buy more Rolls-Royce shares at the current price of 89p? Let’s take a closer look.
Patience was the key
The Rolls-Royce share price has been steadily climbing in the past few weeks, from a low of 78p to a high of 95p. Much of this has merely been down to perceived improvements in stock market conditions.
Having purchased shares at 98p some months ago, it hasn’t been easy to watch the share price gradually slip. Given my analysis of the underlying business, however, I simply have to remain patient.
The pandemic also appears to have reached an end. This could be good news for the firm, because it is paid by the flying hour by airlines using its engines.
For the four months to 30 April, flying hours were up 42%, year on year. Given that international travel is recovering at pace, it seems highly likely that income from these engine service agreements will only increase.
Rolls-Royce has also been closely involved with innovative aviation projects, like Project Sunrise. Run by Australian airline Qantas, this seeks to make regular flights between the east coast of Australia, and London and Paris.
The airline has purchased 12 Airbus A350 aircraft for the project, powered by Rolls-Royce’s Trent XWB-97 engines. This could further bolster the company’s civil aerospace revenue. Any pandemic resurgence, however, could bring this operation to a halt.
Defence and nuclear
Rolls-Royce recently secured a number of lucrative defence contracts, including with the US Air Force. Due to the pandemic, there is currently a backlog in orders.
However, the war in Ukraine may push governments to increase defence spending in the coming months and years. This could be positive news for Rolls-Royce.
The business has also been developing small modular reactors (SMRs), which could provide energy from nuclear power. This has attracted investment from the UK and Qatari governments.
Other countries, like China, are also investing heavily in nuclear power in a bid to move away from oil, gas, and coal. Rolls-Royce could stand to benefit from this move.
Before the pandemic, the share price was around 300p. Factors putting pressure on shares now include the war in Ukraine, as the firm faces shortages of raw materials, like titanium. Inflation and rising interest rates have also increased negative investor sentiment towards the company.
With a return to pre-pandemic conditions, I think my shares could increase greatly in value from where they are currently, although I am not making a precise price target.
Overall, conditions are improving for this industry giant. It’s not been easy holding my shares, but I was never tempted to sell when they fell. I think the future could be bright and I’ll be buying more shares soon to lower my average weighted price.
