Rolls-Royce (LSE: RR) faced big challenges in 2020, and its full-year results released Thursday only confirm that. Interestingly though, the Rolls Royce share price has risen, presumably on the news.
Why the Rolls-Royce share price is up
I think the Rolls-Royce share price rose for two reasons.
One, poor results were already priced in. Support services to aviation is the big revenue source for RR. Since travel in 2020 was restricted, RR was bound to feel the impact. The company’s updates have been reflecting this. So have weak trends in the Rolls-Royce share price.
Two, times are changing. The worst of the pandemic now seems to be behind us. And travel is expected to be back soon. Rolls-Royce will be back in business, because of this.
Optimism about this recovery is evident in RR’s outlook. It says “Looking ahead over the next couple of years….we expect the rebound in global GDP and lifting of travel restrictions to drive our recovery”.
According to the International Monetary Fund, global growth will be 5.5% in 2021 after a fall in world output in 2020. It is expected to rise by another 4.2% in 2022.
This can bode well for RR, which expects hours flown by its engines to increase to 80% of the levels seen in 2019 by 2022. This is a big jump in the 55% levels expected for 2021.
Why the RR share price can cross 200p
This is somewhat encouraging and I think it can increase RR’s share price further. The Rolls-Royce share price is presently at 115p, which is already an increase of around three times from the lows we saw last year.
I think it may well be possible now that the RR share price can rise back up to its pre-pandemic levels of 200p and above. Besides the improving environment for RR and its outlook, I think there are two other reasons it can happen.
One, other coronavirus and lockdown impacted stocks like Lloyds Bank and Cineworld have recently seen a jump in their share prices back up to pre-pandemic times. For investors still looking for post-market crash bargains, RR is still among them.
Two, the US government just passed a massive fiscal stimulus of $1.9trn. If these funds are indeed spent in the manner intended — to improve infrastructure and economic wellbeing that creates higher consumption — we could see a boom in US growth. This in turn, will impact the rest of the world positively.
Moreover, it could mean another stock market rally, which could raise share prices across the board, including the Rolls-Royce share price.
A word of caution
Much can still go wrong. The pandemic is not over. The threat of coronavirus variants still lurks. Further, RR’s financials are weak and will take their own time to recover. This adds to the fact that RR was in an uncertain place even earlier.
Attractive as the Rolls-Royce share price might look for the near future, I would consider the downside too before making a long-term investment in the stock.
Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.