The Rolls-Royce (LSE:RR) share price has been quite the roller-coaster ride recently. The beleaguered aero-engine producer has been on a downward spiral for some time now. Yesterday’s news that Pfizer has reportedly created, tested and stockpiled a Covid-19 vaccine with 90% effectiveness caused a market frenzy.
At the close of business yesterday, the FTSE 100 was up approximately 5%. The Rolls-Royce share price benefitted from this upward surge of market activity. As I write this, RR’s share price is up nearly 70% since yesterday morning. But does this latest surge change anything for the shorter- and longer-term prospects for RR? Has Pfizer cracked the code and will normality eventually resume across the aviation industry and the world? I’m not convinced.
Rolls-Royce: a flight risk?
With national and international restrictions on travel, the aviation industry has been plunged into ruin. RR’s business has taken a substantial nosedive. Despite the current surge and market activity, I am not changing my view about RR’s current investment viability.
At the end of last week, Rolls-Royce shares could be picked up for just 71p. You would have to go all the way back to 2004 to see such levels. As I write this, I can buy shares for close to 115 per share.
With net debt rising, RR announced a rights issue to generate cash flow. Forecasted net debt for the end of 2020 stands at close to £3.5bn. I believe no matter how well the aviation industry may bounce back, this figure will surely affect finances for a long time. In addition to that, Rolls-Royce announced that 1,400 jobs would be cut from its aerospace division.
I must admit Pfizer’s news is encouraging. But if you scratch beneath the surface and delve deeper into the finer detail, you will find some gaping holes. The vaccine in question has not been peer reviewed. Additionally it has not been approved by the Food and Drug Administration (FDA) in the US. To top off these issues, there will be undoubtedly be logistical and political challenges to overcome before we see any vaccine distributed too. I believe the current market surge is a premature overreaction by everyone seeking positives in a mostly negative year.
What I would do now
Rolls-Royce is a stock I would steer clear from right now, and the market surge does not change my thinking. There are too many uncertain variables in the RR recovery equation. Net debt is a major concern for me and it continues to rise. The fact we are in a second lockdown shows this pandemic is not over. We do not know how many more lockdowns we may have to endure. The aviation industry will need approximately the next half a decade to recover from the recent downturn according to some reports.
According to Statista, airlines stand to lose approximately $314bn in revenue due to this pandemic and market downturn. This is why I am looking at diversifying my portfolio by investing in stocks that present better chances of success than Rolls-Royce and most of the aviation industry. I, for one, am not buoyed by the RR price surge, see it as a false dawn, and really like other FTSE 100 blue-chip stocks right now.
