The Rolls-Royce (LSE: RR) share price has been falling. In fact, the stock is currently trading below 90p. But despite the recent fall, I’m optimistic that the Rolls-Royce share price can recover in 2021.
I’d buy the stock on this dip. Here’s why.
Why is the Rolls-Royce share price falling?
In short, Rolls-Royce has exposure to the civil aviation space. It makes most of its money from selling aircraft engines and servicing them. And so if people are travelling less this will impact the company’s revenues. It’s pretty simple to understand why the share price fell last year. The pandemic caused a lot of uncertainty. But the same is happening again.
Up until a month ago, the stock was recovering. But Covid-19 case numbers are on the rise in the UK again, driven by the Delta variant. Hospitalisations and deaths are also increasing, but thankfully not at the same rate.
Couple this with restrictions being eased and this has created uncertainty in the markets. In fact, the FTSE 100 index was down over 2% yesterday, which highlights that investors may be thinking that the UK government is opening up the economy too soon. Another lockdown hasn’t been ruled out and it has caused a degree of uneasiness.
Of course, this is going to impact travel-related stocks and Rolls-Royce is one of them. It doesn’t help when Health Minister Sajid Javid is having to self isolate after testing positive for Covid-19. At the same time the UK Prime Minister and Chancellor are having to isolate as well.
So should I buy?
I’m worried that the number of coronavirus cases are rising. And I reckon the number could rise further now that the economy has reopened. Of course, this is going to have a knock-on effect on the Rolls-Royce share price.
But for now I’m encouraged by the fact that the number of hospitalisation and deaths aren’t increasing as fast as case rates. On this basis, I’d buy Rolls-Royce shares on the dips. I think that in the long term, the company can weather the coronavirus storm.
It’s worth noting here that the company still expects to turn free cash flow positive at some point in the second half of 2021. It reckons travel will recover and also its cost savings initiatives should start paying off. This has yet to be seen. In fact, the firm expects to announce its interim results on 5 August. So I’ll have a better understanding if the company remains on track.
For now, Rolls-Royce has sufficient liquidity and its earnings from its defence sector as well as the money from its disposals to rely on. It also has a strong brand and reputation. Hence I think the stock can recover in 2021.
But if things do get worse, it may come to the market and ask for more money. I don’t think this will be viewed positively by investors as it means that times are still tough for the company. This may impact the Rolls-Royce share price. And there’s no guarantee that it will be able to raise the funds.
As I said, I feel it has done enough so far and taken the right steps. I think this Covid-19 uncertainty has created a buying opportunity and I’d buy the stock on the dips. I think the stock can recover in 2021.
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Nadia Yaqub 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.