The Rolls-Royce (LSE:RR) share price is climbing again, up another 10% over the last month. And I think there could be more to come.
I can see at least three positive signs for the company in the near future. And if I’m right about that, the stock could have further to rise.
Travel demand
Around 45% of Rolls-Royce’s revenues come from its Civil Aerospace division. So strong travel demand is probably the most important thing for both the business and the stock.
The CEO of Delta Airlines said this week that demand for travel has never been stronger. And this is especially true of international travel.
According to the company, if it had more aircraft, it would be able to fill them. The issue the industry is facing is that it is constrained by supply, not by demand.
This is extremely encouraging for Rolls-Royce. Its engines are primarily used in long-haul aircraft and the more hours they spend flying, the more money it makes servicing them.
Winning contracts
Another positive sign is the fact the company’s winning contracts, especially in defence. Over the last month, Rolls-Royce has been attracting new business in a few different areas.
One is in naval propulsion. Last week, the business announced it had won a contract to supply engines for the latest models in Japan’s destroyer programme.
Another is in aviation. Rolls-Royce also recently announced it has been selected to work on propulsion for the latest US presidential jet aircraft.
The impact of these specific projects on the firm’s bottom line might be small. But they show the company’s position at the forefront of aerospace technology’s still strong.
Interest rates
Earlier this week, the European Central Bank decided to cut interest rates for the first time in five years. If the US and the UK do the same, this could be very positive for Rolls-Royce.
One is that it might indicate that further rate cuts are coming from the Federal Reserve and the Bank of England. This could lead to increased spending in key areas for the company.
Another is that the business still carries a lot of debt from the pandemic. This is coming down, but the chance to refinance it at lower rates would be helpful for cash generation.
It’s not just Rolls-Royce that stands to benefit from lower interest rates. But there’s a clear reason why the company would benefit more than others.
Still a buy?
The Rolls-Royce share price is definitely riskier than it has been. And investors have seen just how vulnerable the business can be to even a short-term disruption to travel.
This could be brought on by several things – an economic downturn, a terrorist act, or even another pandemic. Any of these could interrupt the company’s recovery and hit the stock.
Risks are both genuine and inevitable, but the question for investors is whether there’s enough to be positive about to justify considering the stock. And I think there might be.
