Will the Rolls-Royce share price reach 150p this year?

Christopher Ruane examines bull and bear cases to consider whether the Rolls-Royce share price can reach 150p in 2021.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Many shareholders in Rolls-Royce (LSE: RR) have been preparing for take-off in recent months. The Rolls-Royce share price is down 11% over the past year. But it has returned an impressive 165% since the start of October. So for some shareholders, the price movements have been very profitable.

Here I take a look at both bull and bear cases for Rolls-Royce. I then consider whether the Rolls-Royce share price could rise to 150p this year.

A Rolls-Royce bull case

The company is one of the world’s leading manufacturers and maintenance providers for aircraft engines. This is a highly skilled industry with high capital expenditure requirements and lead times stretching into years or even decades. That means the competitive barriers to entry are high.

The Rolls-Royce brand name and engineering expertise are well-regarded. This helps give it pricing power. It also builds customer loyalty. That could help the Rolls-Royce share price because the majority of the company’s profits are generated not by engine sales but servicing.

In 2019, for example, the company sold £3.2bn of civil aircraft engines. But it recorded a further £4.9bn in service revenues for the sector. Even with flying hours reduced by the pandemic, 2020 service revenues came in at £2.8bn.

Not just civil aviation

Additionally, there is more to Rolls-Royce than just civil aviation. Defence spending tends to be more resilient than consumer travel. Last year, the company’s defence business actually grew underlying revenue by 4% to £3.4bn. It also grew underlying operating profit by 8%, to £448m.

The company also has a power systems division. While its revenue and profit also suffered last year, at least it is not also tied to consumer travel demand. Defence and power systems provided 51% of company revenue in 2020. Unlike civil aviation, both turned in an underlying operating profit.

With liquidity of £9bn coming into 2021, the company looks able to wait for a full recovery in demand. This month it reiterated its expectation that it would turn cash flow positive in the second half of this year. That appeals to me because I like buying shares in cash generative companies.

A bear case on the Rolls-Royce share price

Set against this, demand for flying is coming back slower than hoped. Limited vaccination programmes and ongoing lockdowns in many countries are stymying travel.

In October Rolls-Royce had said it expected 2021 widebody flying hours to be around 70% of 2019 levels, but it has since reduced that forecast to 55%. Less flying hours means less service revenue. The reduced forecast may push back the date when the company can achieve its free cash flow target of at least £750m.

The company has been seeking to improve liquidity further through cost cuts and disposals. But this week it was announced that the Norwegian government has stopped the sale of its power business in Norway. The company still plans to raise at least £2bn from disposals by early 2022. But this may now require a different approach.

I think the shares can reach 150p

The Rolls-Royce share price has performed strongly in the past few months. I think further good news, such as more flying hours being logged, could help propel the shares higher, maybe to 150p in 2021.

But key factors – such as demand – remain outside the company’s control. I would prefer to invest in a company with a clearer short-term demand outlook. I’m still not buying Rolls-Royce.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

christopherruane 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »