Rolls-Royce (LSE: RR) has had one of the rockiest rides of the pandemic. Rolls has been up and down so far in 2021, going nowhere really in May. And we’re still looking at a fall of more than 60% over the past two years.
Now, I’m going to say right up front, I’ve no idea where the Rolls-Royce share price is going to go in June. But we’re heading for developments that should affect the longer term. And I still can’t work out whether to buy Rolls-Royce shares as a recovery pick.
For one, the next step in pandemic opening up is scheduled for 21 June. On that day, the government has pencilled in the removal of the final legal restrictions on social and business movements. Saying that, there’s that Indian variant thing. And the Prime Minister has already said we might have to wait a bit longer to get our full freedoms back. Further delays could see the Rolls-Royce share price weaken in June.
Still, the opening up that we’re already enjoying is having its effect. In particular, sun-seekers are heading for the beaches again. And some travel-related shares are recovering. International Consolidated Airlines shares are up 26% so far in 2021, with easyJet not far behind with a 21% gain. TUI hasn’t had such a good year so far though, dropping a few percent. And the Rolls-Royce share price is down 4%.
Rolls-Royce share price drivers
It’s probably going to be a while before the travel sector recovery feeds through to Rolls-Royce. It’ll take time before engine maintenance requirements start to ramp up again. The other critical thing is that Rolls-Royce suffered big loss in 2020, and needed a major financial rescue package.
There’s still cash on the books to keep the aerospace engineer going for a while yet. But will it be enough to last until profits return?
The uncertainty behind that question must, surely, weigh heavily on the Rolls-Royce share price for at least a few months yet. At full-year results time, Rolls wasn’t in a position to make much in the way of predictions. That’s not surprising, as the company spoke of the uncertainties of the near- and medium-term outlook for civil aviation.
It’s all about cash
And we shouldn’t expect the cash situation to reverse in the current year. With those results, Rolls said it expects free cash flow to turn positive in the second half of 2021. But it still expects to suffer a free cash outflow of around £2bn for the full year.
The company is hoping for positive free cash flow in 2022 of at least £750m. But that depends critically on the pace of recovery in flying hours, and the success of the firm’s cost-cutting strategy.
I’m keenly awaiting first-half results due on 5 August. Any updates on the expected cash flow situation could drive the Rolls-Royce share price in either direction. In the meantime, any positive news from the aviation business in June and beyond would be welcome.
I’m not buying yet. I’m going to wait for the clouds of uncertainty to clear a bit.
Alan Oscroft 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.