I reckon the worst is probably behind Rolls-Royce (LSE:RR) now. The company has plenty of liquidity in my view and it’s forecasting that it will turn cash flow positive some time in the second half of this year. Even if civil aviation remains weak, the odds are pretty high that air travel will eventually recover given the vaccine rollouts in my view. With the Rolls-Royce share price now around 110p per share, should I buy? Here’s what I think.
Vaccines & variants
As I have written before, I reckon a short-term factor that affects the Rolls-Royce share price a lot is the battle between Covid-19 vaccines and variants. On that front, there is some new news.
In terms of vaccines, the US recently approved Johnson & Johnson’s one shot vaccine, which should increase supply by a fair amount over the next few quarters. Although it isn’t as effective as Pfizer or Moderna’s vaccines, the Johnson & Johnson vaccine only takes one shot and thus could offer potentially better compliance. Even better, the US government has also brokered a deal where Merck has agreed to help make Johnson & Johnson’s vaccine. Once Merck progresses enough in production, supply should increase even further. As a result of better than expected production and government efforts, vaccine supply may not be a big issue in the US by June, a date that’s faster than many had previously expected.
On the variant news, there is one new concern. Apparently one variant in Brazil can reinfect people. Meanwhile other variants continue to spread. Given the variant developments, I think it makes the rolling out of Covid-19 vaccinations even more urgent.
In the battle between vaccines and variants, I’d say that the vaccines are currently ‘winning’ given that the number of new cases are falling in many places. If the number of cases continue to drop meaningfully, I think expectations for a rebound in air travel could rebound and that could continue to help the Rolls-Royce share price.
The Rolls-Royce share price: what I’d do
Although I don’t know what’s going to happen, I personally think that the vaccines will win out, and as a result, I’d buy Rolls-Royce given the current share price. Although the variants will spread, I reckon companies could potentially come up with vaccine candidates that will eventually target those strains more effectively. Technology is rapidly improving, especially now that scientists have arguably solved the protein folding problem.
With that said, the timeline of the recovery in air travel is highly uncertain even if the vaccines are currently winning. Rolls-Royce management themselves previously thought that 2021 widebody engine flying hours could rebound to 70% of 2019 levels. Due to current conditions, they revised their estimate down to 55% of 2019 levels in late January. A weaker air travel market could make things difficult for Rolls-Royce financially.
I also don’t know what’s going to happen in the upcoming earnings report. The results could be good or they could disappoint. If they disappoint, the Rolls-Royce share price might not do as well.
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