Will the Rolls-Royce share price keep falling?

Rupert Hargreaves takes a look at why the Rolls-Royce share price has been falling and assesses if there could be further declines ahead.

| 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.

The Rolls-Royce (LSE: RR) share price has slumped over the past six months. The stock is off around 11% since the middle of January. This has wiped out most of the company’s gains over the past year. The stock is now up just 2.2% over the past 12 months.

It’s impossible to pinpoint the exact reason why the stock has been falling recently. And if it’ll continue to do so.

However, it looks to me as if the market is starting to become concerned about the group’s recovery prospects. With new variants of coronavirus spreading worldwide, these could disrupt the aerospace industry’s recovery in the months ahead. 

Bad news for the Rolls-Royce share price 

Such a development would almost certainly be bad news for the company. Most of the engines it sells to the civil aviation industry are sold on maintenance contracts.

Under these contracts, Rolls only breaks even on the initial sale. The real money is made on the maintenance contracts sold with the engines. Unfortunately, these contracts tend to be linked to the number of flying hours each machine completes. Therefore, if aircraft are grounded, Rolls won’t get paid. 

The above suggests that the company may miss its own target to return to cash flow break-even in the second half of 2021 if virus variants lead to additional lockdowns. 

Of course, this is just speculation at this stage. The company hasn’t yet admitted it’ll miss its targets. Further, figures show that air travel has recovered to around 90% of pre-pandemic levels in the United States at least.

If this trend continues, I think the Rolls-Royce share price will likely find some support and slow its declines as the industry’s fundamentals continue to improve. 

As the world’s vaccination programme continues to gain traction, I think it’s likely we’ll see this outcome. As long as passengers continue to fly, Rolls will continue to generate cash, which will support the group’s balance sheet and the share price.

Disagreements 

Still, it seems that some investors disagree with this view. They appear to believe that the company’s outlook is deteriorating as new variants of coronavirus disrupt reopening plans. I think this remains a genuine risk to the firm’s prospects but, overall, governments seem determined to reopen economies, and I believe the Rolls-Royce share price will benefit from this. 

At the same time, the company’s balance sheet is much stronger than it was this time last year. The immediate threat of bankruptcy has been removed. The group has billions of pounds of financial flexibility and headroom in its borrowing facilities. I think this provides the business breathing space to deal with further shutdowns, if necessary. 

After considering all of the above, I think the Rolls-Royce share price will likely continue to decline as the market tries to digest news regarding virus variants. However, I believe the group’s fundamentals should only improve from last year’s devastation, which could drive the stock higher in the years ahead. 

As such, I’d buy Roll-Royce shares for my portfolio today as a speculative investment.

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.

Rupert Hargreaves 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

Is Scancell the best penny stock for me to buy today?

The Scancell share price is on fire, jumping by 50% since July! But is this just the tip of the…

Read more »

Investing Articles

Are we soon to see a skyrocketing stock market?

The stock market could be on the verge of surging next year as interest rates fall and innovation takes off,…

Read more »

Investing Articles

How I’d use £10 a day to build a lifetime of passive income

Zaven Boyrazian explains his three-step plan to help generate a passive income in 2024 by putting aside just £10 a…

Read more »

Stack of one pound coins falling over
Investing Articles

Unlocking a £111k yearly second income starting with a £20k ISA!

Taking advantage of a tax-free account to invest in stocks is a smart way to build towards a substantial future…

Read more »

Investing Articles

Warning! 2 FTSE 100 shares I think could collapse in 2025

The FTSE could be in for another strong year in 2025 as interest rates fall. But the outlook may be…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

2 cheap penny stocks for growth AND dividends!

Royston Wild thinks these penny stocks are great all-rounder options for his portfolio. At current prices, are they too cheap…

Read more »

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.
Investing Articles

Best British value stocks to consider buying in November

We asked our freelance writers to reveal their top value shares, including a Share Advisor 'Fire' stock first recommended almost…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 reasons why I’ll avoid cheap Barclays shares in November!

Barclays shares look like a bona-fide bargain based on predicted earnings. But Royston Wild thinks the FTSE 100 bank remains…

Read more »