The Rolls-Royce (LSE:RR) share price has fallen 30% in 2022. But strong news from the airline industry has halped the FTSE 100 engineer recover ground more recently.
City analysts remain torn as to whether Rolls-Royce shares are now an attractive investment. Stock screener Digital Look says three brokers with ratings on the business consider it a ‘buy’. Four say it’s a ‘sell’. And 10 are sitting on the fence with a neutral rating.
Will the aerospace giant’s share price continue to rebound next year? And should I buy the company for my own investment portfolio today?
2 reasons to buy Rolls-Royce shares
A stream of cheery trading updates from airlines is good news for Rolls-Royce heading into 2023. Last week, TUI said that underlying earnings (on a EBIT basis) were up 750% at its Markets & Airlines division between July and September.
The load factor on TUI’s planes also clocked in at a high 92% in the quarter. Civil Aerospace is Rolls-Royce’s single biggest arm, accounting for 44% of group revenues. So solid momentum across the airline industry bodes well for its shares in 2023.
The company is also witnessing steady progress at its Defence division, its second-largest unit by sales. Rolls described trading here as “robust” last month and it booked $1.8bn worth of aftermarket services contracts between January and October.
The geopolitical fallout of the Ukraine war should bolster defence-related sales looking ahead. Rising tensions over Chinese foreign policy could also drive demand for its plane engines and related services.
3 reasons to avoid Rolls-Royce shares
There are clearly reasons to be optimistic, then. But there are also serious dangers hanging over Rolls-Royce heading into the new year.
Firstly, the recent recovery in the airline industry looks extremely fragile. As the global economy toils and high inflation damages consumer confidence, demand for plane tickets could be set to slump in the short-to-medium term.
Supply chain problems and soaring costs are also likely to persist into 2023. Worryingly, these problems have been alarmingly expensive so far. The business swung to an eye-watering £1.6bn loss between January and September as a result of these pressures.
Continued government stagnation concerning nuclear reactor construction is another threat to Rolls-Royce shares in 2023.
Creating energy from alternative fuels could be a highly profitable area for Rolls going forwards. Last year the business received government backing to build a fleet of 16 small reactors across the UK.
But discussions with parliamentarians on a proper funding model are yet to even begin. Outgoing company chief executive Warren East even warned this week that those involved “need to get on with it.”
The verdict
On balance, I believe the risks of buying Rolls-Royce shares far outweigh the potential rewards. The stakes are particularly high given the huge amount of debt the company has on its balance sheet, too. It had £4bn worth of undrawn debt as of the end of October.
I think there are much better recovery stocks available for me to buy for next year.
