The FTSE 100 has soared to three-month highs in recent sessions. But renewed optimism over the global economic rebound hasn’t lifted demand for all UK blue-chip shares. The Rolls-Royce (LSE: RR) share price, for instance, continues to struggle for traction following its eye-popping descent of late March.
The engineer’s current price of around the 110p mark per share is still a vast improvement from its autumn lows, though. Back in September the Rolls-Royce share price fell to its cheapest since spring 2003. Where can we expect the FTSE 100 aerospace giant to go from here?
The bear case for Rolls-Royce’s share price
There are several reasons why the Rolls-Royce share price could sink again.
#1: A colossal debt pile is the main reason I worry about Rolls-Royce. The company has taken action to keep its head about water, which has included issuing new shares, announcing asset sales and taking on more debt. Yet the balance sheet is expected to get worse before it gets better. Net debt is predicted to swell to £4bn in 2021 from £1.5bn last year. I can likely rule out the chance of dividends returning any time soon.
#2: Rising Covid-19 infection rates mean that huge doubts remain over when airlines will be able to take to the skies en masse again. Major travel restrictions in 2020 meant that Rolls-Royce’s large engine flying hours crashed to 43% of the previous year’s levels. Hopes that levels will recover to 55% and 80% in 2021 and 2022 respectively could end up in tatters if coronavirus variants keep emerging and slow vaccine rollouts continue in key regions.
On the plus side
That being said, there are a number of factors that could help the Rolls-Royce share price rebound strongly. The carnage that Covid-19 has inflicted on the firm’s balance sheet has encouraged massive restructuring measures. Up to 9,000 roles will be reduced in a plan the FTSE 100 company thinks will deliver run-rate savings of £1.3bn at least by the close of 2022. These steps to slash the cost base and improve efficiency could create significant long-term rewards.
It’s also possible that Rolls-Royce’s venture into producing greener plane engines will produce rich rewards over the long term. The company began building components for its low-emissions UltraFan system last year with a view to building a fully-working demonstrator by the end of 2021. The business is also investing heavily to develop all-electric and hybrid-electric propulsion systems at its Power Systems division. It’s hoped that demand for more sustainable engineering products will boom as lawmakers accelerate the green agenda.
In spite of these efforts, however, I’m not tempted to buy following the recent Rolls-Royce share price drop. Weak engine sales and poor demand for the engineer’s servicing packages could drag on for some time as the Covid-19 crisis continues. The FTSE 100 firm doesn’t have the financial platform to weather a prolonged downturn, at least not without resorting to measures like accruing more debt or issuing more shares. I’d much rather buy other, lower-risk UK shares for my ISA today.
Royston Wild 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.