Rolls-Royce (LSE: RR) shares have caught my eye as they’ve fallen below 100p. So far this year the stock has decreased by over 4% and is flat the past 12 months.
So should I buy now at the current level? Well, I’ve been bullish on the company for some time and I’d use this opportunity to snap up some shares.
Why have Rolls-Royce shares been falling?
A significant portion of Rolls-Royce’s revenue is derived from civil aerospace. This is where it delivers and services aircraft engines. So naturally, any negative news regarding travel restrictions is going to hit the stock.
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The Delta coronavirus variant has been spreading across the UK and there are concerns that countries will start to to restrict travel for any visitors coming from here. This clearly doesn’t bode well for the travel industry and has cast doubts on when the sector will resume any kind of normality.
So just when I thought that sentiment towards travel was improving, investors are worried about the implications of rising Covid-19 cases in the UK. This uncertainty has hit Rolls-Royce shares.
The positives
I don’t think all is lost though. There are a few reasons why I’m bullish about the company.We have a new health secretary, Sajid Javid, right in the middle of another wave of rising Covid-19 cases. And yesterday, he confirmed that the UK remains on track for ‘Freedom Day’ on 19 July.
Also, the green list of countries that people can fly to has been expanded. This is encouraging news and I don’t think should be overlooked. While the number of coronavirus cases is increasing, I’m glad that the number of fatalities remains very small. The vaccines appear to be working and the continued rollout of the jabs should be positive for Rolls-Royce shares.
Of course there’s no guarantee Freedom Day will happen. A further rise in Covid-19 cases could result in its date being pushed back further. This would mean that the travel industry may experience another lost summer like last year. This would hit the engine maker’s revenue and could impact the share price negatively.
Broker view
As I mentioned, I’m upbeat about Rolls-Royce shares. And investment bank Berenberg named the stock one of its ‘key picks’ in civil aerospace earlier this month.
In fact, the analysts argued that the deep restructuring should drive bigger operating margins within three to five years in comparison to pre-pandemic levels. If this does happen, it could mean that Rolls-Royce has emerged out the crisis in better shape. It kept its ‘Buy’ rating from Berenberg with an unchanged price target of 150p.
My view
I don’t expect it to be smooth sailing for Rolls-Royce, but I reckon there’s light at the end of the tunnel for the company. I agree with Berenberg that the cost-cutting will help and means that it’s operating from a low base. This should work in the firm’s favour and hence, I’d buy the stock.
