Since early December, the Rolls-Royce (LSE:RR) share price is down almost 30%, wiping out some of the gains after the rally that began in October. The fall also means its 12-month decline is 60%+ when factoring in the rights issue’s effects.
Why has this happened just as vaccines seem to offer light at the end of the lockdown tunnel? I see the increasing spread of Covid-19 variants such as the South African and UK strains as a key factor. Some Covid-19 vaccines don’t work as well against the variants. There have been reports that the vaccine made by AstraZeneca isn’t as effective against moderate and mild cases of the South African strain. This has caused some concern among investors over how quick the travel sector’s recovery might be.
The changing nature of Covid-19 variants could affect the Rolls-Royce share price going forward. After all, RR is very much a share dependent on what’s happening globally, rather than just a successful vaccine rollout in a few countries. But how much could Covid-19 variants affect the Rolls-Royce share price going forward?
Mutating virus
It’s impossible to fully vaccinate everyone against Covid-19 in a very short amount of time. So Covid-19 could always be around and will also very likely continuously mutate. Some mutated strains could spread fast — some commentators have already said the UK strain could become dominant globally.
There’s always the possibility that a mutation gets out of control again before new vaccines arrive. Such mutated strains could severely disrupt air travel’s recovery trajectory.
I think that makes the future of air travel-linked stocks hard to predict. Essentially, the threat of new variants means an airline can’t say that it will make X amount of money next year with as much certainty as before the pandemic. What might his mean for shareholders? I reckon companies might feel the need to have stronger balance sheets than pre-pandemic levels to prepare for any potential declines in travel ahead. That could mean lower capital returns in the near term.
And the Rolls-Royce share price?
Because Rolls-Royce sells jet engines to airlines and maintains them, variants also affect the company. If airlines try to beef up their balance sheets more to protect against potential variant effects, some might delay orders for new jet engines. This could mean a more-drawn-out recovery phase for Rolls-Royce’s civil aviation unit.
How the variants affect the Rolls-Royce share price going forward is unclear given the uncertain nature of mutations. On the upside, if the pandemic can be controlled globally by current vaccines and new vaccines developed quickly to deal with mutations, I see potential for the Rolls-Royce share price to rise.
I think the company’s civil aviation unit will recover, but could take a while to fully do so.
I’d still buy Rolls-Royce shares, however, given the company’s potential in green technologies. Rolls-Royce is a leader in aircraft engines and I think it could be a leader in electric aircraft engines and/or electric aircraft in the future too. This is an area its moving into. With aircraft such as electric air taxis potentially being more convenient than regular land vehicles in many cases, I reckon the market could be huge. If management makes the right decisions, I feel Rolls-Royce has a big growth opportunity ahead that could add a lot of value.
