Unpopular opinion alert! Why I’m concerned about the Rolls-Royce share price

Jon Smith scratches his head with the Rolls-Royce share price, based on recent developments impacting civil aerospace.

| 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.

Stack of British pound coins falling on list of share prices

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.

Over the past year, Rolls-Royce (LSE:RR) shares have fallen by 14.6%. For the past few months, they have struggled to even rally back above the psychologically important 100p level. With us now in a summer of air travel chaos and a cost-of-living crisis, I’m struggling to think of reasons why the Rolls-Royce share price could rally.

Civil aerospace performance is key

At a group level, Rolls-Royce has a variety of different divisions that help to generate revenue. However, the civil aerospace arm is the dominant area. In the 2021 results, it contributed revenue of £4.5bn towards a total figure of £11.2bn. Therefore, the fate of this area is key for the business overall.

I don’t think the outlook for civil aerospace is positive. In recent weeks, we’ve seen thousands of flights cancelled in the UK. This isn’t just a UK-specific issue, with similar problems being reported on around Europe.

It’s not for me to decide the root cause of who is to blame for the summer meltdown. Yet the key point is that air miles aren’t going to be increasing. This has a knock-on impact for Rolls-Royce, which won’t need to service, maintain or offer new engines for planes that aren’t flying as much.

Another point of concern is the cost-of-living crisis. Even if flight operations get resolved in coming months, I wonder how much demand in H2 will be seen. Outside of summer holidays, I think many consumers will look for domestic trips, rather than flying abroad. The cheaper option should help to conserve finances during a time when money it tight. This could be the same for business aviation, too.

Further macroeconomic challenges

In the upcoming half-year report, due out next week, I expect the business to flag up more problems. These relate to the increase in core raw material prices, as well as other inflationary pressures.

Further, in the recent trading update, the business commented that “we are working closely with our global supply chain to limit the impact of disruption and will continue to adapt our plans as the global situation evolves.” As far as I can tell, disruption in this regard has only gotten worse, not better, since then.

These business challenges aren’t unique to Rolls-Royce. I don’t blame management for not being able to deal with higher input costs. However, I do think that these issues mean that Rolls-Royce shares will struggle to materially move higher until resolved.

The flipside for the Rolls-Royce share price

I don’t want to come across all doom and gloom. It’s purely my viewpoint and I could be wrong. For example, the defence division is continuing to perform well, with the trading update referring to a strong order book. Rolls-Royce Electrical and Rolls-Royce SMR are also growing, with the backing from third party investment.

It’s also true that the blip in civil aerospace could just be for the rest of the year, with a brighter outlook for 2023 and beyond. Only time will tell in this regard.

Ultimately, I don’t feel comfortable enough to invest right now, so will be looking for options 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.

Jon Smith and The Motley Fool UK have 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

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »