How much can change in a month! Take the case of aero-engine manufacturer Rolls-Royce (LSE: RR). From this time last month to now, it has gone from being a penny stock to one increasingly worth taking note of. Its share price has risen over 20%.
This followed its positive results, which showed a return to profits. I shared some back-of-the-envelope calculations that forecast its share price in my last article on the company, and it was clear to me that it could rise more. So far, that is exactly the trajectory its share price is taking.
Here’s what’s going for the Rolls-Royce share price
And I think broader fundamentals support it too. The FTSE 100 index has been strong in August on average, indicating investor confidence. This is particularly good for travel stocks, which were most affected by the pandemic and which remain some of the most sensitive stocks even now. Travel companies are also set to benefit from the easing of restrictions, right in time for the late summer rush. Since a big chunk of Rolls-Royce’s revenues come from civil aviation, this will also be a positive for it.
Its own operations also seem to be progressing well. The company is in the process of disposing of its non-core maritime engine business. It has also recently won a new contract from the UK’s Ministry of Defence. And it has surprised with positive results.
What can go wrong
However, there are downsides too. The Bank of England expects inflation to rise to 4% as the UK economy recovers fast. While I have little doubt that policy-makers will do all they can to keep the price rise contained, there are a number of economists who believe that high inflation is here to stay.
Oil prices, for instance, may have softened in the past month, but are still significantly higher than where they started this year. International Consolidated Airlines Group (IAG) flagged rising cost pressures in one of its recent updates. If these are passed on to consumers, air travel demand may be impacted. This in turn, could impact Rolls-Royce, which also services engines.
It remains to be seen whether the company’s profit recovery can continue. A big tax credit helped it the last time. I am not sure if such a booster will show up the next time around.
What I’d do now
In any case, it is unlikely to release any new results soon. So in September, its share price will continue to be governed by the overall mood of the stock markets, macro conditions and any news flow on the company itself. So far it looks that the Rolls-Royce share price is headed in the right direction. But considering how many factors it is impacted by right now, I am keeping my fingers crossed.
Also, no matter which direction its share price takes, I am waiting for a genuine recovery in its bottom line before buying the stock.
