With the Rolls-Royce (LSE: RR) share price dropping below 100p, I am tempted to buy this stock before the civil aerospace company’s recovery becomes fully realised.
But with possible further damage to the aviation sector brewing because of new variants of coronavirus such as the Delta variant, some investors might see this share as one to be avoided.
Here, I explain why I will be betting on a favourable future in 2021 for Rolls-Royce.
Another lockdown could be devastating for Rolls-Royce
First things first, I need to look at what another lockdown could mean for the Rolls-Royce share price.
With no planes in the air due to travel restrictions, Rolls-Royce would continue to lose revenue on its maintenance contracts as these are dependent on airtime. This would be a big blow for the company because these contracts contribute to Rolls-Royce’s main bulk of revenue, whereas the company only just about breaks even on the initial sale.
However, this is just speculation for now, and the situation looks a lot better than it did last year. Rolls-Royce is not making any adaptations to its recovery plan for the time being, and with air travel having its busiest weekend since the pandemic hit, I am quite hopeful that this is a sign of positive things to come.
Rolls-Royce restructuring programme
Following on from its cost saving plan from 2020, Rolls-Royce estimated that it saved £1bn beyond its expectations before the pandemic arrived. The company now aims to reach £1.3bn in operating costs and capital spend savings by the end of next year.
Of course, we can see that Rolls-Royce is steadfastly committed to its restructuring programme as it temporarily shut down its plant in Renfrewshire this week. With the company continuing to do good on its word to cut costs, I am convinced that its commitment will lead to more investor confidence on the Rolls-Royce share price.
Further, the balance sheet looks a lot healthier than compared to last year, and the threat of bankruptcy is no longer in sight. This is mainly because the company secured £7.3m in additional liquidity in 2020.
If the company meets its expectations of turning cash flow positive in the second half of 2021, then I think this success will attract a lot of buyers. This could lead to a very profitable return for me if I add this share to my portfolio before Rolls-Royce announces its interim results on the 5th of August.
Will the Rolls-Royce share price recover?
The dark times of Covid-19 could very well be behind us, but with this new Delta variant and any more variants to come, the situation could change very quickly. The effects of another lockdown would most likely damage Rolls-Royce’s progress, and its thoughts of turning cash flow positive would become an all-forgotten dream.
However, I think that the current situation points in a more positive direction. Passengers are flying again, and the government is putting more countries on the green list. I also have confidence that Rolls-Royce’s restructuring procedure will put it on the road to recovery.
Whilst it may still be a bit of a bumpy ride for the Rolls-Royce share price, I will be buying this stock as a recovery play.
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John Town has no position in 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.