Rolls-Royce (LSE: RR) shares hit a low on Monday, crashing below 90p to eight-month lows. They recovered a bit by yesterday’s close, but not significantly so. When it was last at these levels, the Rolls-Royce share price was actually on its way up. This was in November last year and the stock market rally had just begun. Now is the exact opposite situation. It has been falling for much of the past month.
Better times ahead
At any other time, I would have not thought of buying Rolls-Royce shares at such a juncture. But this time things are different.
We have finally passed Freedom Day in the UK, which makes any Covid precautions discretionary (for now). Also, in the UK, North America and much of Europe, at least 50% of the population has had at least one vaccine shot. This means that we are closer to travelling in big numbers again than we have been at any time in the last year.
Considering that 60% of the company’s revenues come from the supply and servicing of civilian aircraft, this is good news indeed. This segment has been a big drag in the recent past, even while its power systems and defence segments have been in better health.
Disposals programme gathers pace
I reckon that it will still be some time before Rolls-Royce can get its financials in order. But I think the worst may be over for it. Besides an improved outlook, this is because of its notable commitment to its £2bn disposals programme. It initiated this last year in a bid to get back to financial health after the pandemic.
In December, it decided to sell off its nuclear instrumentation business to French civil nuclear energy company Framatome. It is also trying to sell its Spanish aircraft engine business, ITP Aero and Bergen Engines, its maritime engine maker.
Most recently, media reports have said it plans to sell its stake in AirTanker, which leases aircraft to the RAF. Rolls-Royce has a roughly 50% stake in the company, while much of the rest is owned by Babcock International, the defence and nuclear engineering business.
What’s next for the Rolls-Royce share price?
I think these are positive developments but we should have a better idea of how things are progressing only by the end of the year. This is because, by then, more data on the recovery should be available.
But the Rolls-Royce share price can start rising before that. The rise in new coronavirus cases that caused a mini market meltdown a few days ago now seems to be behind us. And prices of sensitive stocks are moving up. This includes Rolls-Royce, which is up by 6.3% in today’s trading.
Also, stock markets have a tendency to preempt the future. So by the time its updates reflect better health, I reckon that will already be priced in, assuming that the markets remain buoyant.
I am still cautious though, because it was not in a great place even before the pandemic. And any setbacks in reopening global travel could hit it hard. But going by improving conditions at the moment, it is on my watchlist for now.
