Rolls-Royce (LSE: RR) shares have performed poorly recently. This year, the Rolls-Royce share price is down more than 40%.
Can the shares recover in 2023? I think it’s certainly possible. That said, for the FTSE 100 stock to recover, certain things need to happen, to my mind.
Can Rolls-Royce shares rebound?
For a start, the company’s operating environment needs to improve. This year, the aviation industry has experienced enormous disruption. Many airlines have cancelled flights due to staff shortages and other operational issues.
This has had a negative impact on Rolls-Royce because the company generates a large chunk of its revenues from servicing jet engines, which is linked to flying hours. In the first half of 2022, those flying hours were around 60% of pre-pandemic levels. If industry conditions improve, Rolls-Royce shares could get a lift.
It’s worth pointing out that China could have a big impact here. This year, many Chinese cities have been on lockdown due to the country’s zero-Covid policy. This had led to a collapse in international flights out of China. An end to the Russia/Ukraine war could also have a positive impact on flight numbers.
Profits need a boost
Secondly, inflation and supply chain issues need to ease. These have had a negative impact on profits of late. For the first half of 2022, for example, underlying operating profit was £125m, down from £307m a year earlier.
If these issues ease, the company’s profits should get a boost. There’s no guarantee they will though. It’s worth noting here that in the company’s recent H1 results, management said it expects inflationary pressures and supply chain constraints to persist into 2023.
Share price targets
Finally, we need to see sentiment from the broker community improve. Recently, they have been downgrading their earnings forecasts. For example, in the last month, the consensus earnings per share forecast for this year has fallen by 0.3p to 1.2p.
Brokers have also been cutting their share price targets. JP Morgan, for example, recently reduced its price target for the stock to 60p from 70p. This kind of activity can put negative pressure on a company’s share price. While brokers are making these kinds of moves, the Rolls-Royce share price is unlikely to stage a decent recovery.
Should I buy Rolls-Royce shares for 2023?
Putting this all together, there’s certainly a chance that Rolls-Royce shares could recover in 2023. We could see less disruption in the airline industry next year. And we could also see supply chain and inflation issues moderate.
Having said that, I won’t be buying Rolls-Royce shares for my portfolio for 2023. For me, there’s too much uncertainty. All things considered, I think there are safer stocks to buy for my investment portfolio today.
