The Rolls-Royce (LSE: RR) share price currently rests at 128p, a 10% decrease from the 142p it sat at in early November. This is due to the rising investor fears of the emerging Omicron variant. However, the company’s FY21’s half-year results highlight a focus on financial restoration, evidenced by a large cash flow generation. This explains the 32% rise in share price in September alone.
A look at Rolls-Royce’s considerable increase in liquidity and research development suggests further potential for this stock. I am now encouraged to consider this past month’s price decrease as a buying opportunity. But with a trading update due December 9, how high can the Rolls-Royce share price go?
Operational risk
The company has been continuously challenged by the pandemic’s headwinds on operational construction and cut back on product demand. Rolls-Royce’s annual report for FY20 highlights the company’s struggles with the pandemic, reporting a decrease in underlying revenue from £16,875m to £11,824m across the year. This resulted from the negative impacts on airline demand from coronavirus restrictions.
The Omicron variant suggests further problems ahead. Yet such problems are market-wide, with the FTSE 100 index dropping 4% in late November. This explains the similar price drop in the Rolls-Royce share price. But a focus on its long-term development shows this company to be very well equipped to tackle this new coronavirus variant.
Managerial development
Extensive financial development is a promising feature for this aerospace company. Despite revenue losses, recent targeting of research and other revenue streams has met managerial aims for financial restoration.
A look at the half-year report shows underlying revenue to have only decreased from £5,410m in H1-2020 to £5,227m in H1-2021. Indeed, the company has significantly dropped the revenue decrease suffered during 2019-20. Rolls-Royce has also shifted its focus onto more stable and prospective areas. For example, an increase of £43m in research and development costs suggests the company is adjusting aims toward future expanse. A 4% rise in Defence revenue highlights the ongoing restructuring designed to counteract the impacts of the virus on the aerospace market.
Would I buy Rolls-Royce shares?
A commitment to operational reduction and equity increase has certainly contributed to the value of Rolls-Royce stock. As seen in the half-year report, an 8,000 (of a target 9,000) role reduction has been achieved. This has contributed to the £0.9bn decrease in net debt. Additionally, the £1.7bn increase in free cash outflow has placed the company’s overall liquidity in a strong position. Rolls-Royce’s price-to-earnings ratio is now around 15. This suggests the company may be undervalued, particularly if profits continue to recover.
Rolls-Royce’s revenue and operation has suffered throughout the past year. However, the success of recent financial management has established a concise direction out of this prolonged pandemic. This leads me to have high hopes for the trading update due December 9. Overall, I consider this past month’s dip in share price a great buying opportunity for my investment portfolio.
