Rolls-Royce (LSE:RR) shares have enjoyed a decent start to 2021. The share price is up around 15%, over a period when the FTSE 100 index is only up around 3%. This outperformance has coincided with the release of full-year results, the UK vaccination initiative gaining momentum, and other factors. Over a broader one-year period, the share price is still down over 50%, but I think there are several reasons to be more optimistic for 2021.
The first reason I’m optimistic for Rolls-Royce shares might sound strange. It’s actually relating to the full-year results that came out last week. The loss before tax was £2.9bn, an exceptionally large figure. Even though this figure was well-reported in the news, Rolls-Royce shares traded sideways on the release date.
Normally I’d expect a share price to plummet on such a bad figure, but it got me thinking. Rolls-Royce shares are already heavily down from 2020. Regular trading updates made investors aware of the bad situation within the company. So really, it was no surprise when the final figure came out. In effect, the share price didn’t fall because it was expected.
So if I can discount the loss, what else was there to think about? Well the company cut £1bn in costs during the year. It raised £7.3bn in new capital, and expects to generate £2bn from selling off different assets. From that angle, 2021 looks positive.
A second reason I’d look to buy Rolls-Royce shares is the diversification of the business. For a while, I thought of the business only operating in the civil aviation space. Although this is the largest area, it’s not the only one. The results showed that good profits were made from its power systems and defense arms. In fact, the revenues generated from these two areas combined were larger than from civil aerospace.
Going forward into 2021, if these areas can continue to grow, and civil aerospace recovers, Rolls-Royce shares could see a strong move higher. The business would be firing on all fronts, something it hasn’t been able to do in the recent past.
Sentiment helping Rolls-Royce shares
The final reason I like Rolls-Royce shares is the correlation between positivity and the rising share price. When I mean positivity, I’m talking about the sentiment regarding the pandemic. Here in the UK, the vaccination rollout is marching on. In the US, President Biden has also set out an ambitious timeframe to get people vaccinated. The more this continues, the quicker international travel and flying will start again.
On balance, there are still reasons to be cautious with the stock. For example, the impact of the pandemic is likely to linger for some time. It’s not as though anyone can click their fingers and restore the billions lost in 2020 overnight. It’s going to be a slow road to recovery, and one that could weigh on Rolls-Royce shares for a while still to come.
As a long-term investor, I can look past this. I would look to buy the stock, even with the knowledge that the recovery won’t be overnight.
The post Rolls-Royce shares: 3 reasons why I’m optimistic for 2021 appeared first on The Motley Fool UK.
jonathansmith1 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