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I like Rolls-Royce stock for these two reasons

Jay Yao
·3-min read
Aircraft wind on the sunrise sky background.
Aircraft wind on the sunrise sky background.

Rolls-Royce (LSE: RR) stock hasn’t done well in 2020.

Given that jet engines make up a big part of Rolls-Royce’s overall business, the company has lost a lot of money as many airlines have faced financial difficulties given Covid-19.

Given its weakened financial condition, Rolls-Royce’s management has also had to resort to a dilutive equity rights issue as one method to strengthen the balance sheet. While the company undeniably still faces some difficult headwinds, I nevertheless think there are a few signs that shares could recover for long-term inventors. Here are two of them.

China air travel rebounding quickly

I think one potential reason for a positive surprise for Rolls-Royce is that air travel in China has rebounded rather quickly. China is one of the few large economy countries that has successfully contained the coronavirus through a mix of intensive testing, contact tracing and stringent measures such as lockdowns.

Due to the lack of fears over the coronavirus, China’s GDP has quickly rebounded and air travel in the country has rebounded faster than many had expected.

According to the Civil Aviation Administration of China, the country’s September domestic passenger numbers rebounded to 98% of the levels in last year’s corresponding period. Meanwhile, the September number of domestic flights in China was actually higher than the corresponding period last year.

I think the fact that China’s air travel has rebounded so quickly to near pre-Covid-19 levels is good news for Rolls-Royce.

Not only will China be a huge customer for jet planes in the coming years, but also the development could be good news for the air travel industry outside China. After all, if air travel in China could recover faster than anticipated, then it could happen outside of China.

In terms of those air travel expectations, I would argue that they’re pretty low right now, which one can see by the fact that many aerospace stocks are still down.

Debt offering

I believe another reason for optimism over the stock is that Rolls-Royce recently raised debt at a lower than expected rate according to many estimates.

Specifically, in October, the company raised £2bn in debt with coupons between 4.625% and 5.75%. Of the debt issued, an euro-denominated debt issue ended up more than 0.6 percentage points lower than what was initially offered.

Having a lower than expected cost of debt is important because it gives Rolls-Royce more runway to make it through the pandemic. I think raising more money at a lower than expected cost also improves sentiment.

Now that it has raised billions, Rolls-Royce is in better position to make it past the difficult time.

If the company can make it past the pandemic, i think there’s good potential upside given the long-term growth prospects of air travel and the industry’s limited competition.

The post I like Rolls-Royce stock for these two reasons appeared first on The Motley Fool UK.

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Jay Yao 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