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As the Rolls-Royce share price climbs 10% to lead the FTSE 100, here’s what I’d do

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Travel-related stocks are climbing Tuesday, as world confidence improves, and Rolls-Royce (LSE: RR) is leading the way. It’s leading the FTSE 100, at least. The Rolls-Royce share price is on a 10% gain at the time of writing. International Consolidated Airlines is just a little way behind, with a 6% gain on the day so far.

In just the last few weeks, the Rolls-Royce share price is up more than 70%. But the problems facing the aeroplane engine maker are far from over. The recent share price strength would be more impressive had it not been for the stock’s larger-scale troubles. Rolls shares are still down more than 80% year-to-date.

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Part of the recent fall is down to more than six billion new shares being admitted to the stock market on 28 October. It was part of Roll’s capital-raising to keep it going until its business gets off the ground again. But it does show that we’re looking at a very different company today. Previous valuations mean nothing now. And we really need to start again when deciding whether the Rolls-Royce share price suggests a buy.

Rolls-Royce share price uptick

Thinking of the recent gains, I’m still rather sceptical. Covid-19 vaccine trial results have gone some way towards the improved sentiment. And Donald Trump grudgingly conceding that the US presidential transition needs to go ahead has boosted markets too.

But Rolls looks set to turn in at least two years of losses. The forecast loss for 2021, though, is only modest. It means that I have no real way to work out a fair valuation for the Rolls-Royce share price. And debt problems will be around for some years yet. I don’t see any need to take the risk.

While most attention is on FTSE 100 stocks, I can’t help wondering if TUI (LSE: TUI) is perhaps being overlooked. The FTSE 250 travel company was severely punished in the early days of the stock market crash. An initial steep dive saw the TUI share price fall as low as 218p in March, for a whopping 78% year-to-date loss.

The shares have been closely tracking the Rolls-Royce share price for most of the year, starting on a bit of a recovery in the summer, then soon turned tail again. But in the past month, TUI shares have gained 64%.

A good year, gone

TUI gave us a pre-close update in September. In it, perhaps ironically, it revealed that January 2020 had seen the best bookings in the company’s history. At the time, before the pandemic hit, TUI had been “on track to deliver a strong result for financial year 2020.”

We’ve had plenty of talk around a rumoured capital raise, and the company has confirmed that as an option. But it reckoned it would be a short-term measure, at significantly lower than press speculation had suggested. But as of 20 September, the company had liquidity amounting to around €2bn. That included a stabilisation package provided by the German federal government.

TUI should release full-year results in December. As TUI shares race past the Rolls-Royce share price, investors seem optimistic. But with no profits on the cards for this year and next, I’d scrutinise those carefully before I made any buy decision.

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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.

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