I wish I was smart enough to have recognised a few months ago just how massive the turnaround in Rolls-Royce (LSE: RR) shares would turn out to be.
Unfortunately the share price didn’t wait for me to make up my mind while I was weighing up my case for investing. It more than doubled in half a year!
Clearly, there were a few things savvy investors spotted here some time ago. What were they? And do they still apply for new investors getting on board at 155p per share? Let’s discuss.
New leadership
One thing that shrewd investors might have spotted as a share price catalyst was that a new CEO taking over. The company announced last summer that Tufan Erginbilgic would take the helm at the beginning of this year.
The oil-industry veteran is aiming to make the engineering group a leaner and eventually a more profitable enterprise. And he is confident that the firm can increase its free cash flow this year.
Still, it has some way to go to pay down its £3.3bn net debt, which accumulated when the pandemic grounded civil aviation and devastated its balance sheet.
But clearly new leadership has attracted investor interest.
China reopening
The second thing some investors may have appreciated was just how much of a boost the reopening of China would give the stock.
There are almost 600 Rolls-Royce Trent family engines in China. That represents roughly a 50% market share of widebody engines in the country.
Large engine flying hours reached 65% of 2019 levels last year. But as Chinese travel rebounds strongly, management now anticipates that figure could reach as high as 90% of pre-pandemic levels this year.
Geopolitical tensions
A final thing that investors may have appreciated the significance of was the deteriorating geopolitical environment since Russia invaded Ukraine just over a year ago.
With more than 16,000 military engines in service, Rolls-Royce is a powerful player in the defence aerospace engine market. It has around 160 customers in 103 countries.
Indeed, its defence division is its second-largest unit by sales, and looks poised to grow as governments increase military budgets.
Last month, the company announced its nuclear reactors would power a new fleet of Australian submarines. This was part of a massive trilateral agreement between Australia, the UK, and the US.
But growth in its defence division isn’t guaranteed. If a hoped-for peace settlement was reached in Ukraine, that may prompt some European nations to lower their defence budgets.
That said, current geopolitical tensions extend far beyond Europe. And Rolls-Royce has reportedly offered to develop an entirely new fighter jet engine for the Indian Air Force.
This would be a new, potentially massive market for the firm. And the contracts could start really rolling in if a free trade deal between the UK and India (still in negotiation) is reached.
My move
Putting all this together, I’m very bullish on Rolls-Royce’s future direction. And I note the share price is still down 48% from five years ago.
Further out, I also expect the company to start paying dividends again. Indeed, management is committed to “resuming shareholder payments” once its finances are in better shape.
So I’m going to start a position in Rolls-Royce when I have cash available.
