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The Rolls-Royce share price is up 11% in a day! Would I buy the FTSE 100 stock now?

Manika Premsingh
·3-min read
Plane on runway
Plane on runway

I last wrote about the FTSE 100 aerospace and defence giant, Rolls-Royce (LSE: RR), a couple of weeks ago. At the time, the Rolls-Royce share price was falling fast. Cut to this Friday afternoon, and the share is recovering fast. It’s up 11% from Thursday’s close as I write. It’s tumble was so steep that the share price still has some way to get back to where it was two weeks ago. With the FTSE 100 index trading weak, I am not sure if it will do so in a hurry. Yet, the very fact that the RR share price is defying the FTSE 100 trend says something.

Healthy investor appetite for bond offering

So what’s the reason for this rise? Earlier in the month, RR decided to recapitalise through a fund raise. Part of this was planned to be through a bond offering to the tune of £1bn. However, in a press release this week, it said that it was now raising bonds worth more than £2bn, “Given strong demand from investors…” Further, UK Export Finance has decided to guarantee support of up to 80% for a £1bn loan taken by RR. This is in addition to the £2bn, five-year loan already raised by RR.

Can the Rolls-Royce share price continue to rise?

It’s good news that investors and guarantors have faith in RR, but to a limited extent. The Rolls-Royce share price has taken quite the beating this year, as the lockdowns impacted aviation, which is an important source of RR’s revenue. This has resulted in a weaker financial position for it and the resultant recapitalisation that’s now underway. If the pandemic situation was coming under control, the debt raise at a bad time would be easier on the company.

However, that isn’t so. UK is locking down again, and has also put Italy on its quarantine list. So, civil aviation can be expected to remain in a spot for now. This will keep RR in an uncertain place too. I’d hold back from buying the company’s shares.

A promising FTSE 100 share

This is especially because other FTSE 100 stocks can give investors superior returns compared to the Rolls-Royce share price. This is true even for other engineering companies, like Spirax-Sarco Engineering (LSE: SPX), which has seen a healthy share price increase since the stock market crash a little over six months ago. In fact, it’s now at all-time highs.

There are three reasons for this. One, despite a dent to its revenues in its latest update, its operating profit margin has improved. And two, it actually increased its interim dividend by 5%. Its dividend yield remains quite low, especially because its share price has increased quite a bit. Even so, I think dividend increases are reserved for confident companies at this time. Which brings me to the third reason. Spirax-Sarco’s confidence is evident from the fact that it has kept its full-year earnings guidance unchanged. Even with the sharp run up in its share price, I’d prefer it to the RR share price right now.

The post The Rolls-Royce share price is up 11% in a day! Would I buy the FTSE 100 stock now? appeared first on The Motley Fool UK.

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Manika Premsingh 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 2020