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Rolls-Royce shares: what would I do now?

Rupert Hargreaves
·3-min read
Union Jack flag hanging from a building
Union Jack flag hanging from a building

I think it’s fair to say that Rolls-Royce (LSE: RR) has been on a wild ride this year. Rolls-Royce shares started the year at 681p, before plunging to a low 250p at the height of the coronavirus crisis. The engineering giant’s stock then continued to trend lower as rumours began to surface about the company’s ability to continue as a going concern.

At the beginning of October, the organisation unveiled its turnaround plan. A multi-billion pound cash call was announced, which eliminated any immediate concerns about the group’s solvency.

Since then, the stock has surged in value. In the seven days after the cash call was announced, Rolls-Royce shares more than doubled in value.

Following this performance, I think there could be more to come from the engineering giant. While the company’s near-term outlook is far from certain, its valuable intellectual property isn’t going to vanish overnight.

Intellectual property

I reckon this is where the real value lies. Rolls-Royce is one of the two primary producers of jet engines in the world. It’s also a leading producer of marine power systems and, more importantly, nuclear power systems. Its leadership in the latter arena could pay big dividends in the decades ahead and boost Rolls-Royce shares in the bargain.

Proponents of nuclear power have long been campaigning for the government to back a series of so-called Small Modular Reactor (SMR) power stations around the UK. These are cheaper and easier to build than larger nuclear power stations.

There’s now talk that Westminster may be ready to splash out £2bn on these schemes. Rolls-Royce could be a key player in the development of these projects.

It will also remain a key player in the aerospace market. Management’s £5bn rescue plan has guaranteed the company’s future and should restore confidence in the group among customers.

Speculation that the company could merge with fellow UK engineering champion BAE Systems has also resurfaced in recent weeks.

A deal between the two companies would make a lot of sense as the cost benefits and synergies achieved by combining two of the largest aerospace and engineering companies in the country could be significant.

A merger may also help these two businesses win customers on the international stage thanks to their size, economies of scale and global brand recognition.

The outlook for Rolls-Royce shares

As such, I think Rolls-Royce shares could be worth holding for the long term. The company is facing some significant near-term headwinds, but investors should look past these problems and focus on the long term.

Its engineering prowess in the aerospace market is second to none, and government backing of SMR power stations would provide a profits windfall for the group.

Now that the company has reinforced its balance sheet, it can focus on its long-term ambitions, rather than near-term liquidity problems.

The post Rolls-Royce shares: what would I do now? 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 2020