For years I flirted with buying Rolls-Royce (LSE: RR) shares as the aircraft engine maker hit one bout of turbulence after another. Last month, I finally took the plunge.
I’m glad I delayed. The Rolls-Royce share price has been falling for years. When I clicked the ‘buy’ button, they were down 75% over five years. That included a drop of 17.62% in month prior to the purchase, which is partly what stung me into action.
Rolls-Royce shares are climbing for now
I thought the sell-off had been overdone. I liked the idea of buying Rolls-Royce stock when investors were down in the dumps and minding their step around risky stocks like this one.
I’m feeling a little smug because the share price has jumped 30.08% in the last month, but I also know that means little. Most shares on the FTSE 100 are also in positive territory over the month, with the index climbing 6.26%. Performance over such a short timescale means nothing, but it’s still nice.
Investors are feeling more bullish as they gamble that interest rates won’t rise as fast as feared. With US inflation stateside falling to 7.7% in October, they’re hoping the US Federal Reserve will turn dovish sooner.
The recovery in Rolls-Royce shares hasn’t been purely driven by macroeconomic news. On 3 November, the company reported that the post-Covid rebound in air travel has continued, with flying hours up 36% year-to-date. The company makes much of its money from engine maintenance contracts, which are based on miles flown. When fleets are flying, so are revenues.
US and Europe have been leading the charge, although ongoing Covid lockdowns in China have hit travel across Asia.
Inflation is another headwind, but Rolls-Royce has some protection via its long-term energy and raw material supplier contracts. Debt is a worry as interest rates rise so I was pleased to see that management had used the proceeds from its completed ITP Aero disposal to pay off another £2bn. It now has around £4bn of drawn debt, of which £2.8bn does not start to mature until 2026.
This FTSE 100 stock could fly one day
Rolls-Royce still has a long journey ahead of it, but I knew that when I bought the stock. Inflation is driving up labour costs, while further Covid lockdowns and the recession could slow air miles growth. I still think the direction of travel is clear, and positive.
It also has a long-term opportunity in building small modular nuclear reactors, although that project is still in the early stages (and will suck up capital).
While the Rolls-Royce share price is up today, it could just as easily fall tomorrow. The company still faces a host of challenges at a difficult time. Short-term dips won’t bother me, as I bought it for the long haul.
I reckon I secured a decent entry price, although there are never any guarantees with shares. Since I hope to be holding for 10 to 20 years, I can give management time to really get the business flying. Who knows, one day Rolls-Royce might even pay me a few dividends, too.
Harvey Jones holds shares in Rolls-Royce. 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.
Motley Fool UK 2022