The Rolls-Royce (LSE:RR) share price has likely reflected the recent battle between Covid-19 vaccines and variants. Initially, the Pfizer vaccine candidate news really beat efficacy estimates in November and the Rolls-Royce share price rallied. Later, Covid-19 variants spread and made the prospect of a fast recovery in civil aviation more distant. The Rolls-Royce share price fell as a result. With the Rolls-Royce share price now close to the 100p level and everything that’s happened, here’s what I’d do.
Vaccines versus variants
In the battle between the vaccine and the variants, it’s not the end of the world for Rolls-Royce. While the spread of Covid-19 variants has slowed the recovery in civil aviation, the company still expects to turn cash flow positive at some point in the second half of 2021, according to a trading update released earlier in the year. Management is also confident that they are well positioned for the future given the company’s liquidity of around £9bn.
At its current stage, I reckon the Covid-19 vaccines are getting a slight upper hand on the variants. Production of Covid-19 vaccines has ramped up higher and the number of new cases has fallen in many parts of the world. If the number of new cases continue to decline sharply, there is the possibility that civil aviation recovery expectations could increase and this could potentially benefit the Rolls-Royce share price.
There could also be hope in the future against variants. Companies like GlaxoSmithKline and CureVac are, for instance, working on multivalent mRNA Covid-19 vaccine candidates that could target variants more effectively. The two companies, which are working together, hope to bring a multivalent product onto the market next year. If the late stage results of those multivalent vaccine candidates are positive, I reckon that civil aviation recovery expectations could increase.
With this said, Covid-19 is constantly mutating and there is potential for a new strain to hinder civil aviation more than expected. As a result, the Rolls-Royce share price could always decline.
Rolls-Royce share price: what I’d do
Given the current information on Covid-19 variants and the current Rolls-Royce share price, I’d buy shares. Making quality and dependable jet engines is one of the hardest things in the world to do. It takes a lot of engineering know-how that I think gives Rolls-Royce a potential competitive advantage in future growth sectors. I think civil aviation will eventually recover and RR could be a good investment as a result. I could be wrong, however, if a new Covid-19 variant spreads and becomes a big problem.
I’d also follow the annual result report next month, particularly when it comes to future guidance (if management provides any). If Rolls-Royce beats the market’s real estimates on earnings or guidance, I could see how the stock could go higher. I could also see the stock going lower if the results are underwhelming. I’d also be interested in how the company’s planned sale process of ITP Aero is going. I reckon a higher than expected sale price could help the stock.
Jay Yao has no position in any of the shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. 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.