Whatever happens with the pandemic over the next few weeks and months, 2022 is going to be a crucial year for the Rolls-Royce (LSE: RR) share price. After two years of disruption, the company needs to get itself firmly back on track. Currently, it looks as if the group will be able to do just that.
But there is a lot that could go wrong from here on. So I think three different scenarios are likely to dictate the stock’s performance next year.
Three scenarios
In the best-case scenario, the global aviation industry will bounce back. If air traffic returns to, or exceeds, 2019 levels, the company could beat its own profit and cash flow projections.
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As long as governments impose no more travel restrictions to try and control the spread of the pandemic, this could help rebuild market confidence in the business. As confidence returns, it seems likely the Rolls-Royce share price will also recover at least some of its pandemic losses.
In the base-case scenario, Rolls will continue to muddle through the crisis. In this situation, I think the company will meet its conservative cash flow forecasts of at least £750m in 2022. I believe the current share price is already taking this positive scenario into account so I think the reaction of the stock to such an outcome will be relatively modest.
Finally, the worst-case scenario is a return to the dark old days of the pandemic. Global travel bans and restrictions could force the aviation industry back into cold storage. Rolls would almost certainly underperform its own cash flow forecast in this scenario. The company may even have to raise more money from its investors to strengthen its balance sheet.
In this case, the value of the stock would almost certainly decline, although the scale would depend on whether or not the company has to raise additional capital from investors.
The outlook for the share price
I think the middle scenario is the most likely outcome for the stock in 2022. I think the world is gradually moving on from the pandemic, and we are unlikely to see the sort of travel bans that were imposed at the beginning of 2020.
There are also indications that in some markets (mainly the US), travellers have returned to the skies far faster than expected. This suggests the company could outperform its own expectations. However, at this point, this is far from guaranteed.
So overall, I think the Rolls-Royce share price will put in a positive performance in 2022. As such, I would be happy to buy the stock for my portfolio today as a speculative recovery play. Although the company’s recovery is far from guaranteed, in my eyes, it certainly still has enormous potential.
