Since the pandemic crash, investors have been anticipating a bounce back from the Rolls-Royce (LSE:RR) share price. Economic turbulence and constant travel restrictions have set the company back. And Rolls-Royce shares are down 30.7% in 2022 so far and 19% in 12 months.
But over the last month, the story has been different. While the FTSE 100 is down 4%, the Rolls-Royce share price has risen 6.1%. Is this the turnaround we have all been waiting for? And will I invest in Rolls-Royce shares right now? Let’s find out.
Can this trigger a Rolls-Royce share price recovery?
Over the last two years, I have followed Rolls-Royce’s ambitious restructuring closely. And its efforts have been very impressive. The company identified market demands in its engineering wheelhouse and is now a full-fledged power and defence company along with its civil aviation business.
But Rolls-Royce has also been finding innovative uses for its engines and is now a high-demand product in an unlikely but booming industry. Its mtu engine has been chosen by Chinese generator giant Hefei Calsion to power generator systems in several Chinese semiconductor factories. And I see this as a big boost for Rolls-Royce shares because this could open up a huge potential market for the company.
We are currently in the midst of a semiconductor crisis. The demand for high-capacity chipsets is at an all-time high. Semiconductor chip manufacturers require a steady power supply without even the slightest voltage drop. This is where the reliability of Rolls-Royce’s engines comes into play.
Other positives (and concerns) to consider
I examined the company’s massive defence order book and promising nuclear reactor contracts in December. Both divisions could become high revenue generators in just a few years, which could further boost the Rolls-Royce share price.
With rising geopolitical tensions, defence spending has increased considerably over the last 12 months. And this has also strengthened Europe’s push to be energy efficient and phase out crude oil. And Rolls-Royce benefits from both.
But a big area of concern is the talent drain. The company will lose popular CEO Warren East and power systems boss Andreas Schell by the end of 2022. The company will have to rehire effectively to ensure that the nuclear reactor project remains uninterrupted.
And the huge debt pile of £5.1bn is an eyesore that will eat into future revenue. The company has increased its spending on R&D for its small nuclear reactor project and the new Pearl 10X engine. Also, the current operating margin of 3.8% is pretty low. And the company expects this to continue beyond 2022, given the high R&D investment. This could affect the Rolls-Royce share price when results for 2022 are released.
However, as a potential investor, I think the company’s involvement in these cash-generating sectors is a big plus. I think the business is now streamlined and has focused on the right areas. I am very bullish on both the energy industry and defence. And Rolls-Royce shares offer exposure to diverse markets that will be crucial to my long-term portfolio. The company remains firmly on top of my watchlist and I would consider an investment if the Rolls-Royce share price drops below 80p this year.
