Since the Rolls-Royce Group (LSE: RR) recapitalisation plan was revealed, the shares have jumped. Since a low point on 2 October, the Rolls-Royce share price has more than doubled. We’re looking at a 125% leap. What a great short-term profit that is for whoever braved it.
Rolls-Royce has been among the most dependable FTSE 100 investments for decades. Its engines power a significant portion of the world’s aviation industry. And the company has a very attractive business model.
Rolls doesn’t make its profits from the sales of its engines. No, the money comes from long-term maintenance, repairs and parts contracts. Once an airline has committed itself to a fleet of Rolls-powered planes, you’ve immediately got a predictable stream of earnings. Well, until something like a global pandemic grounds the bulk of the world’s fleets, that is.
I’m sure the aviation business will recover, though I doubt we’ll see 2019 volumes again for some time. And demand for Rolls-Royce’s services will surely strengthen. The big questions hang over the firm’s ability to survive the slump. The answer, for now, is the new recapitalisation plan announced on 1 October. I’m not surprised the share price has responded positively.
Another fallen share
International Consolidated Airlines is in a similar position. It too has just enjoyed a successful capital raise. Since the firm announced its lifesaving deal, the IAG share price has stabilised. And it’s now up around 15% since its lowest point in the crash. IAG shares are still down more than 80% so far in 2020, but the company looks to be in a reasonable shape to make it through to the end of the crisis, and beyond.
But athough I’m optimistic about the long-term future for the airline group, I’m not going to buy. That’s partly because I fear the company will still need further funding. And it’s partly because of my renewed caution over buying recovery stocks. That caution extends to Rolls-Royce too.
The Rolls-Royce share price had suffered almost exactly the same fall as the IAG share price. But now the recapitalisation’s in place, it’s responded significantly more positively. But we still need to put it into perspective. After the rebound, the shares are now down only 65% in 2020. That’s around three times the fall in the FTSE 100, which is down 22%, as I write.
Rolls-Royce share price recovery
So to answer the question, is there still time to get on any Rolls-Royce recovery, I think the answer is an obvious yes. The thing is, what we’ve seen in these past weeks most certainly isn’t a real recovery yet. Over the next few weeks, it’s anybody’s guess where the Rolls-Royce share price might go. And I think there’s every chance it could drift lower again.
I won’t buy myself, as I don’t buy recovery stocks until I see what’s at the end of the tunnel. But if you do invest for recovery, I strongly recommend you judge it on the long-term picture, and not on the share price behaviour over a few weeks during the worst of the crash.
Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.