Hindsight is a wonderful thing. And with Rolls-Royce (LSE: RR) shares on a surge, I’m wondering how much I could have potentially profited if I’d invested in the company during the pandemic.
Serious gains
If I’d put £5,000 into Rolls-Royce shares near the beginning of the pandemic (say, April 2020), today I’d have £13,720. In terms of a return on investment, that’s incredibly impressive. To put that into perspective, had I invested the same amount in the FTSE 100, I’d have £6,890. While the S&P 500 has performed slightly better, I’d still only have £9,150.
That said, investors who piled into Rolls-Royce back then were taking a major risk. The company was under great stress from the pandemic. It lost £4bn in 2020. And the aviation industry, which accounts for just shy of half of its revenues, was brought to a halt. Regardless, if they cashed out today, they’d be sitting on some pretty handsome returns.
Where next for Rolls-Royce?
So, the question on my mind is whether the stock can continue its form. And if so, should I buy some shares?
Many analysts from top investment banks seem to think so. Barclays recently upgraded the stock from ‘equal weight’ to ‘overweight’, while simultaneously upping its price target to 270p. At its current price, that equates to nearly a 13% increase. Morgan Stanley also sees Rolls-Royce continuing its form. The bank has a 275p target price.
Of course, these bullish outlooks will by no means translate into Rolls-Royce stock performing better. And in fact, I have a few concerns with the business. To start, the aviation industry is volatile. We’ve seen the impact the war in Ukraine had had on travel restrictions. The same will likely be the case for the current conflict in the Middle East. This may lead to flight cancellations, which is not good news.
The business also has nearly £3bn in debt. And while that’s not a monumental amount, rising interest rates won’t aid Rolls-Royce in its attempts to reduce this pile. Some of the debt is due before 2025, which could cause further issues.
However, I see a bright future for the firm under the tutelage of CEO Tufan Erginbilgic. When he joined Rolls-Royce at the beginning of this year, he described the business as a “burning platform”. Since then, he’s made strides to improve the company’s efficiency.
This was seen with the announcement of job cuts. The group slashed nearly 10,000 jobs back in 2020 due to the pressures the pandemic placed on it. Erginbilgic has continued this with plans to cut up to a further 2,500 roles.
Time to buy?
So, if I bought Rolls-Royce shares today, would I see similar returns to those from the beginning of the pandemic? Well, that’s impossible to say.
The stock has momentum. I also like the moves it’s taking to streamline its operations. However, I fear its share price has topped out. For now, at least. I won’t be making a move until the New Year. At that point, I’ll reassess.
