Here’s where I think the Rolls-Royce share price could go in 2021

The Rolls-Royce share price (LON: RR) climbed 50% in November. Is this the start of a sustained recovery going into 2021?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Of all the companies suffering in the Covid-19 pandemic, the plight of Rolls-Royce (LSE: RR) pains me more than most. For years I’ve considered it an excellent company and a great long-term investment. But the Rolls-Royce share price has crashed 80% in 2020.

And that’s even after an impressive 50% rebound in November, on the back of vaccine test success. Will the recovery continue?

I’ve always rated Rolls as a top ‘picks and shovels’ company. That’s named after the old gold-rush days, when some prospectors struck it rich while others found nothing but dirt. But whoever hit the gold, those selling the picks and shovels pocketed healthy profits.

Defensive Rolls-Royce share price?

The airline industry is a bit like that. It’s extremely competitive, and airlines have little in the way of differentiation. Warren Buffett famously looks for companies with defensive moats, and even he now reckons buying airlines is a mistake. But whichever carrier is making the best profits, the companies providing the engines should prosper. And that, I’ve always thought, gives the Rolls-Royce share price a defensive edge.

The only problem is, the pandemic has laid them all low. It’s like the gold has all been worked out, and the miners have all left town.

But with the arrival of multiple successful vaccines, the sun-seekers will soon be flocking back to the travel agents and the airports, right? And that will push the Rolls-Royce share price up again, won’t it?

Vaccination timing

Well, the vaccine will not reach everyone overnight. Many of us will have to wait months before we get our jabs. And for the aviation industry, I see another aspect. Let’s look at the priority order for vaccinations.

NHS and other frontline workers will be at the head of the queue. Folks in care homes, the old and the vulnerable, will be next. Others with underlying conditions come after that, and then healthy older people. And finally, the young and fit are at the back of the queue.

So with the exception of frontline workers, people will get their vaccinations roughly in the reverse order of their likelihood of going flying. And frontline workers may well be under pressure to hold off on their holidays too. I suspect aviation won’t recover as quickly as investors hope. And the Rolls-Royce share price will face continued pressure.

Long-haul, short-haul

Even when the planes do start to return to the skies, I see one more thing that could hold Rolls-Royce back. My Motley Fool colleague Karl Loomes has explained it well, and it’s all to do with how far people want to fly. Rolls-Royce is mostly in the long-haul market, selling and supporting engines for wide-bodied jets. But experts reckon demand for short-haul flights will recover fastest, with long-haul demand currently close to zero.

Putting this all together, I think the aviation recovery will be slower than the optimists hope. And Rolls-Royce’s part of it might well not arrive until nearer the tail-end.

For the Rolls-Royce share price, I think that could well mean a traumatic 2021 with little progress. And I can’t see a clearer picture of longer-term prospects emerging until at least the summer. I’m not buying now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft 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.

More on Investing Articles

Investing Articles

Here’s the Vodafone share price forecast up to 2027

Can anything stop the Vodafone share price slide? It's still early days for the company's turnaround plan, so we might…

Read more »

Investing Articles

Down 37%, here’s one of my favourite FTSE 100 bargain shares to consider

This FTSE 100 retailer's shares have collapsed in 2024. Despite tough trading conditions, is now the time to consider buying…

Read more »

Investing Articles

Which do I like best today, Nvidia or Tesla stock?

EV maker Tesla stock is on the up, while Nvidia growth is softening a bit. But they're both in the…

Read more »

Investing Articles

After jumping 15%, my favourite FTSE 250 stock looks set for the premier league

Games Workshop stock recently reached an all-time high, placing it within touching distance of promotion from the FTSE 250.

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

1 top growth stock on my Christmas buy list!

Ben McPoland reveals one top-notch growth stock down 29% that he plans to stuff into his portfolio in time for…

Read more »

Growth Shares

This FTSE 250 stock soared 9% yesterday! Is the party just beginning?

Jon Smith points out a FTSE 250 stock that leapt based on some speculation yesterday, but questions whether to get…

Read more »

Investing Articles

£10k in savings? These 2 gems could make £832 in passive income

Jon Smith outlines a couple of dividend shares with an average yield above 8% that could enhance a passive income…

Read more »

Growth Shares

This major UK bank just updated the forecast for the Rolls-Royce share price

Jon Smith talks through an analyst forecast for the Rolls-Royce share price and explains why he thinks further gains could…

Read more »