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The Rolls-Royce share price has doubled. Here’s what I’d do now

Harvey Jones
·3-min read
Close-up Of Wooden Blocks With Risk Word In Front Of Businessperson's Hand Holding Magnifying Glass
Close-up Of Wooden Blocks With Risk Word In Front Of Businessperson's Hand Holding Magnifying Glass

After a torrid year, the Rolls-Royce (LSE: RR) share price has doubled in just over a week. Investors have been piling in, as management secured the aircraft engineering group’s future with a new debt and rights issue.

Those who bought the Rolls-Royce share price head of the rebound will be celebrating for spotting such a lucrative buying opportunity. Others will be wondering whether today is still a good time to buy, or whether they’ve left it too late.

I’d urge would-be buyers to be careful. You may be arriving a little late to the party, and find a better buying opportunity if you’re patient.

Naturally, the Rolls-Royce share price is still a lot cheaper than it was before the stock market crash, trading 75% lower. Naturally, there’s a very good reason for that.

A risky rebound stock

Rolls-Royce generates most of its revenues from making aircraft engines. Sales have plunged as carriers grounded their fleets due to the global travel lockdown. As the second wave of coronavirus strikes, and fresh travel restrictions are introduced, the share price has looked very dicey indeed.

Rolls-Royce isn’t just reliant on engine sales. The FTSE 100 group generates large revenues from its engine service packages, with maintenance charges based on the number of hours flown. That’s a problem when airlines aren’t flying at all.

The company moved to bolster its balance sheet and underpin its share price by issuing a fully-underwritten £2bn rights issue, plus a new £3bn debt package.

The British government added its heft, guaranteeing 80% of the first £1bn of debt for five years. Analysts reckon it should be enough to keep the group going, providing civil aviation headwinds ease by 2022.

The Rolls-Royce share price got a further boost from plans to make £750m of cost savings over the next year or two. It should also raise another £2bn from planned disposals.

It was enough to bring investors flying back. But what happens next is out of management’s hands. Basically, until we have a reliable vaccine and people can start flying again, its future remains insecure.

I’d buy the Rolls-Royce share price, but not yet

Roll-Royce has been spared from either total collapse, or full government bailout. That’s great, but I would be wary of buying it now. The time to buy the share price was before it doubled, rather than afterwards.

When stocks suddenly fly like this one has just done, they often go through a period of retrenchment as interest wanes and passions cool. It is going to be a long winter, and there could be plenty more bad news ahead for the aviation sector. That’s when I’d buy into the Rolls-Royce share price.

You may feel like you’ve missed your moment, but don’t be disheartened. If you fancy holding Rolls-Royce shares, put the stock on your watchlist and look for an entry point in the uncertain months ahead.

The post The Rolls-Royce share price has doubled. Here’s what I’d do now appeared first on The Motley Fool UK.

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Harvey Jones 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