I suppose I could describe the performance on major stock markets last week as a bit of a washout. The FTSE 100, for instance, dropped 1% between Monday’s opening and Friday’s close as investors fretted about rocketing inflation and the prospect of extreme monetary tightening by central banks. However, the Rolls-Royce (LSE RR) share price held up quite robustly, despite these rising concerns.
In fact, the FTSE 100 engine builder rose 1% during the course of the week. Consequently Rolls-Royce remains a chunky 15% more expensive than it was 12 months ago.
Can the Rolls-Royce share price keep rising?
There are several reasons why I think the Rolls-Royce share price could continue its ascent.
#1: The Covid-19 battle keeps progressing. 2020 might have been a disaster for the aviation industry and by extension the FTSE 100 engineer. But latest financials last week suggest that the company may have turned the corner. Rolls-Royce has noted that large engine flying hours have remained stable since the end of last year. It’s also said that Covid-19 vaccination programmes in a significant number of countries were “encouraging” for its operations.
#2: Defence spending continues to rise. One of the few bright spots for Rolls-Royce last year came from its Defence division. Sales at this unit — responsible for 30% at group level — edged 4% higher in 2020. I fully expect demand from its military customers to keep rising too as broader global arms spending heads relentlessly higher.
Flies in the ointment
There are clearly reasons why the Rolls-Royce share price could keep gaining ground. But the risks of it falling back to earth are not insignificant. In particular, any setbacks in the fight against Covid-19 could prove problematic if they delay a recovery in the global travel industry. The ongoing emergence of fresh virus variants (the Indian edition in particular is causing infection rates to accelerate in some parts of the globe) is a special concern for the industry.
A fresh blow-up is particularly risky for firms with weak balance sheets like Rolls-Royce, naturally. Net debt at the company swelled to £3.6bn as of the end of 2020 from below £1bn a year earlier. And measures to get its pile down through asset disposals haven’t been off to a flyer either. A deal to hive off its Bergen maritime division was shot down on security concerns earlier this month.
City analysts think losses at Rolls-Royce will narrow from 66.78p per share in 2020 to 2.3p this year. Expectations of further recovery in the airline industry mean the company’s expected to flip back into earnings of 3.6p per share in 2022 as well.
These cheery predictions aren’t enough to tempt me to invest, however. The Covid-19 crisis could explode again at any moment, wrecking a bottom-line recovery at Rolls-Royce and putting fresh stress on its debt-laden balance sheet. Besides, I don’t think the Rolls-Royce share price provides particularly-good value right now (it trades on a forward earnings multiple of 30 times). I’d rather buy other UK shares today.
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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.