The Motley Fool

Can the Rolls-Royce share price bounce back?

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.

Image source: Rolls-Royce plc

2020 was a rough year for the Rolls-Royce (LSE:RR) share price. After crashing by nearly 50% in March, the stock continued its downward trajectory until early October.

The business serves multiple industries. But around half of its income comes from the sale and maintenance of aircraft engines. When travel restrictions prevented planes from taking off, a large portion of its revenue stream evaporated. So seeing the stock collapse is not that surprising to me. But is that all about to change? And should I be adding this business to my portfolio?

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

The recovery starts

In October last year, the Rolls-Royce share price reached its lowest point since 2003. But since then, it’s been on the rise. In fact, it’s up by around 165% over the last seven months. What’s causing this growth?

The business managed to secure a £5bn rescue package that brought it back from the brink of bankruptcy. Meanwhile, with the vaccine rollout progressing relatively quickly, it looks like the airline sector is finally starting to take off again. Here in the UK, holiday travel is on track to return later this month. And domestic flights in the US and China are already increasing.

This is undoubtedly good news for Rolls-Royce, and so seeing its share price rise as more planes return to the sky is understandable.

It’s worth remembering that initially, the majority of resumed flights are likely to be short-haul, and the firm’s engines are generally used on long-haul aircraft. So it may take a while longer before Rolls-Royce sees its revenue making a complete recovery. But based on current forecasts, it is expected to return to profitability by 2022. And with the worst seemingly over, it looks like a potential turning point for the business.

The risks that lie ahead

The return of travel is an encouraging sign. But even after the pandemic comes to an end, Rolls-Royce will still have many challenges to overcome, the first of which is its debt. As it stands, it has around £7.3bn of loan obligations on its balance sheet. That racks up a pretty expensive interest bill, and with no operating profits at this time, the firm is having to burn through cash to keep up with payments.

Needless to say, over the long term, this is unsustainable. And if it’s not able to return to profitability in 2022 as planned, I think it’s likely that the company will need to raise additional capital. Naturally, this will likely hurt the Rolls-Royce share price.

The management team has announced its intentions to dispose of non-core assets to build up its cash balance. However, its latest attempt to sell its Bergen Engines subsidiary failed after the Norwegian government blocked the transaction out of national security concerns. And with the currently weak market sentiment, it could take some time before another buyer is found.

The Rolls Royce share price has its risks

The bottom line

The return of international travel does make me cautiously optimistic about the Rolls-Royce share price. However, I think its recovery will be a multi-year process, during which many things could go wrong.

Personally, I don’t believe the risk is worth the potential reward, especially since there are other more promising investment opportunities available today. I won’t be adding this stock to my portfolio.

But there is another stock I've got my eye on because...

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Zaven Boyrazian does not own shares in Rolls-Royce. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.