The Motley Fool

What I think is next for Rolls-Royce shares in 2021

Image source: Getty Images

2020 was a terrible year for Rolls-Royce (LSE:RR). 

While management had previously expected RR to generate free cash flow (FCF) of at least £1bn, the pandemic changed everything. Due to the coronavirus, the number of flying hours in civil aviation dropped sharply. Management now expects negative FCF of £4.2bn for 2020. Given the cash outflow, Rolls-Royce has had to issue more shares through a rights offering. The company also expects to end 2020 with net debt of between £1.5bn and £2bn when excluding lease liabilities. 

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

With that said, the future could be better than the past. 

While 2020 has been terrible, I nevertheless think 2021 will be better thanks to the development and rollout of vaccines. Pfizer’s vaccine has already been approved in both the US and UK and many other vaccine candidates look promising. 

With the arrival of a new year, here’s what I think is next for RR in 2021. 

Rolls-Royce shares: improving fundamentals

Although there is always the risk of new mutations for Covid-19, I think 2021 will be a ‘recovery’ year for Rolls-Royce. In particular I believe management will succeed in their effort in turning cash flow positive sometime in the second half.

Due to the lean times, the company has cut costs a lot and analysts expect air travel in many developed areas to recover to a fair degree by the summer (if not early fall) given the vaccine roll out. 

Continue to try to strengthen balance sheet

Although Rolls-Royce expects to turn cash flow positive sometime in the second half of 2021, I reckon management will continue to try to strengthen the balance sheet through asset sales. Indeed, management has said before that they intend to raise at least £2bn through asset sales, with ITP Aero being key among them. If management gets a higher than expected price for the asset sales, sentiment around the stock could benefit. 

I think management will also try to be conservative and not use any FCF to buy back stock or to pay a meaningful dividend this year too. 

Going green

While RR is planning to shrink in certain areas by selling assets, it is also trying to expand in other areas. 

Given that the market likes many green stocks right now, I believe management will continue trying to go more green. In terms of how I think they will try to do so, I don’t believe they will do big green M&A acquisitions in 2021 because Rolls-Royce still needs to improve its balance sheet. Instead, I think it will focus on trying to leverage existing R&D resources to try to create new or incremental green products, particularly in the company’s power systems division. 

From those efforts, I think Rolls-Royce has an opportunity to grow its sales long term. 

Given that I think the company’s fundamentals will recover over the next few years and I’m also optimistic over RR’s ability to develop new or incremental green products, I’d hold Rolls-Royce shares for the long term. 

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Jay Yao 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.