Although shares are still down by around half over the last 12 months, Rolls-Royce (LSE:RR) shares have rallied recently. As of 24 February, the Rolls-Royce share price is up over 9% over the last week and 14% over the last month.
Given that the aerospace engine maker reports its 2020 full-year results on 11 March, the Rolls-Royce share price could have further moves ahead of it. If the results and guidance are better than expected, shares could go higher. If they don’t meet expectations, shares could decline. With the upcoming full-year result, here’s what I’d do.
The upcoming full-year result
In terms of Rolls-Royce’s upcoming full-year result, I’ll look for several things.
First, I’d look to see if management updates widebody engine flying hours guidance. Civil aviation is a big part of the company’s business and weakness in the area is one reason why management forecasted a free cash flow outflow of around £2bn in 2021. That amount of expected free cash outflow didn’t meet many analyst estimates. If guidance for wide-body engine flying hours is stronger than expected during the full-year result, however, I reckon the Rolls-Royce share price could rise.
Second, I’ll look to see if management updated cash flow guidance. Specifically, I want to see if management is more confident on their free cash flow target for next year. As of late January, management seemed to be hedging somewhat on their target, as they said their goal is “to deliver at least £750 million of free cash flow (excluding disposals) as early as 2022, contingent on the expected recovery in engine flying hours”. If management doesn’t say the contingent part in the full year result report, I’ll be more optimistic on the stock.
I’ll also look for any hints of how the ITP Aero sale process is going. If management gets a higher than expected price for ITP Aero, I reckon there is a chance that the market could value Rolls-Royce’s other assets higher too. If that occurs, I think it could help the Rolls-Royce share price.
Lastly, I’m been keen to see if management gives any updates on their green strategy. For various reasons whether deserved or not, the market is currently pretty optimistic on many green stocks. If that optimism continues and Rolls-Royce successfully sells itself as more of a green stock itself, I reckon there’s potential for higher stock prices.
The Rolls-Royce share price: what I’d do
I’d buy and hold shares given the current Rolls-Royce share price. Although it might take longer than expected due to the spread of Covid-19 variants, I nevertheless think a recovery in civil aviation will happen. Companies like GlaxoSmithKline are working on potential vaccine candidates for variants that might be ready as soon as next year and the number of existing new cases is falling in many areas of the world. Longer term, I think Rolls-Royce has potential to add a lot of value by servicing propulsion systems for the electric air taxi market.
With this said, Rolls-Royce shares could decline if its full-year results don’t meet expectations. If the time to civil aviation recovery lasts longer than expected or if management makes bad capital allocation decisions, the stock might not do well.
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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.