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What’s going on with the Rolls-Royce share price?

·3-min read
Portrait of worried woman standing beside window

Over the past 12 months, the Rolls-Royce (LSE: RR) share price has essentially moved sideways. The stock has returned -1.5% since this time last year. By comparison, the FTSE All-Share Index has returned 22%.

This is a bit of an unfair comparison because the pandemic has severely impacted Rolls-Royce. It suffered one of the most substantial drops in revenue and profitability of any large UK company.

It makes more sense to compare the performance of the Rolls-Royce share price to that of other pandemic-hit businesses such as IAG, easyJet and Tui. But even compared to these stocks, Rolls has underperformed.

The three firms outlined above have returned 11%, 24%, and 47%, respectively, over the past 12 months. Tui has achieved this performance even though it’s been bailed out three times by the German government during this period.

Looking at these figures, I’ve been wondering, what’s going on with the Rolls-Royce share price?

Improving outlook

Rolls’ largest division is its aerospace business. This involves the sale and maintenance of engines for the civil aviation industry. The company gets paid based on the number of flying hours its machines rack up. Therefore, when the aviation industry was effectively grounded this time last year, group revenues plunged.

Since then, the industry has started to recover. Air traffic around the world is currently around two-thirds of 2019 levels. As the outlook for the sector has improved, it’s had a positive impact on Rolls’ outlook. The company expects to be cash flow break-even in the second half of the year. This should draw a line under its pandemic losses.

Unfortunately, it seems as if the market is sceptical the company can hit this target. That appears to be the primary reason why the Rolls-Royce share price has underperformed.

It wouldn’t be the first time the company has missed targets. In the past, the group has repeatedly overpromised and underperformed. Therefore, I think the market doesn’t believe in management’s outlook.

Is the Rolls-Royce share price a buy?

I reckon this could be an opportunity for risk-tolerant investors. Despite its improving outlook, the stock still looks cheap. Although there’s always going to be the risk that the company will miss management’s growth targets.

With that being the case, I’d buy the stock for my portfolio today as a speculative recovery play. However, I’m well aware this isn’t a risk-free investment. I think there’s a very high chance the company will underperform this year. If it does, the stock could continue to languish.

That’s why I’d only buy a small speculative position for my portfolio. While I think the Rolls-Royce share price has recovery potential, the global travel and aviation industry outlook is incredibly uncertain. Unfortunately, there’s nothing the company can do about this uncertainty.

The post What’s going on with the Rolls-Royce share price? appeared first on The Motley Fool UK.

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Rupert Hargreaves 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.

Motley Fool UK 2021

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