The Rolls-Royce (LSE:RR) share price has had quite a rough time since the pandemic began. With the travel industry being decimated, the engineering firm saw one of its primary revenue channels shrivel. Meanwhile, its losses skyrocketed, sending its stock crashing down.
Recently, the Rolls-Royce share price has been creeping upward. Over the last 12 months, the FTSE 100 stock is up by over 25%. It’s still far from returning to pre-pandemic levels. However, with its half-year results just a few days away, is that about to change? Let’s take a look at what might be in store for the business and whether I should be adding it to my portfolio.
The initial collapse of the Rolls Royce share price
The management team has had to take drastic measures over the last 18 months. Due to a £3.1bn loss, some serious capital needed to be raised. This resulted in a significant chunk of debt being added to the balance sheet, the suspension of shareholder dividends, and a large number of new shares being issued. The latter, in turn, caused a significant dilution effect that’s partially responsible for the swift decline in the Rolls-Royce share price.
But as unpleasant as this was, it seems to have been a prudent move, in my opinion. It enabled the management team to quickly improve the business’s liquidity. And keep the lights on while Covid-19 ravaged the world economy. But now that vaccine rollouts are underway, and travel restrictions are being eased, will the share price finally begin its recovery?
The potential for growth
Last week, London’s largest airports, Heathrow and Gatwick, reported the biggest surge in passenger traffic since the pandemic began. To me, it’s not surprising. Now that lockdown restrictions in the UK have ended, many individuals and families are determined to go on holiday. And after more than a year in confinement, I think that’s pretty understandable.
This is fantastic news for the Rolls-Royce share price. With planes finally returning to the skies, the demand for the company’s maintenance services is bound to increase. As will its gross income. What’s more, with corporate and government budgets becoming less influenced by Covid-19, I think the revenue from Rolls-Royce’s Power Systems and Defence segments is likely to start rising again as well.
The bottom line
Until the half-year report is released on Thursday, this remains largely speculation. But should the money start flowing again, especially to its civil aerospace segment, then I think it’s likely that the share price will begin to rise once more.
Having said that, it could be several years before it returns to pre-pandemic levels. As mentioned earlier, a primary catalyst behind the fall of Roll-Royce’s share price was the dilution effect from issuing new shares. These will eventually need to be repurchased to undo this dilution. But with a large pile of debt to contend with, it could be some time before any share buyback programme is announced, let alone the reintroduction of dividends.
Over the long term, a complete recovery may be possible. But for now, I’m keeping Rolls-Royce on my watchlist. It will stay there until the business sheds more light on its current situation later this week.
