The Rolls-Royce (LSE:RR) share price has had quite a rough couple of years. The pandemic unsurprisingly decimated the engineering group’s aerospace revenue stream while simultaneously disrupting its defence and power systems divisions.
But now that the operating environment is slowly improving, can the Rolls-Royce share price return to its former glory? And should I be considering this business for my portfolio?
How is the recovery progress going?
The company as a whole has seen demand for its products and services plummet as Covid-19 shifted spending priorities from both businesses and governments alike. But with the world adapting to the pandemic, demand seems to be back on the rise.
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Its defence segment won the bid for a B-52 Stratofortress bomber replacement engine contract worth $2.6bn (£1.9bn). Meanwhile, order intake from its Power Systems division is slowly recovering, despite the continued supply chain disruptions.
But at the core of Rolls-Royce’s revenue stream lies its aerospace division. And despite travel restrictions being eased, along with increased air travel, average flying hours are still only half of what they were in pre-pandemic years.
This is particularly problematic since this segment makes the bulk of its income from servicing engines rather than selling them. And with overall flying hours remaining depressed, it’s placing pressure on the group’s cash-generating capabilities.
But despite these challenges, the company has successfully returned to a positive free cash flow. And, to me, that’s a promising step on the road to recovery.
What’s next for the Rolls-Royce share price?
While its divisions may be steadily recovering, the group is in dire need of cash. And, consequently, management has executed a massive restructuring of the business, with 9,000 workers losing their jobs. However, this has resulted in over £1bn of annualised savings.
At the same time, several non-core assets and operations have been disposed of. Its Civil Nuclear Instrumentation, ITP Aero, Bergen Engines, and AirTanker subsidiaries have all been sold off, raising £2bn of cash. Most of the proceeds will be used to bring down debt levels, strengthening the balance sheet in the process.
But even if all of it is used to wipe out existing loans, the company will still have around £5bn to contend with. That obviously doesn’t solve the solvency problems Rolls-Royce is facing. However, as most of its financial obligations are long-term, this move provides valuable breathing space as its remaining divisions continue their recovery.
Providing the pandemic doesn’t take another swing at the travel sector, the Rolls-Royce share price looks like it’s on track to climb throughout 2022 and beyond.
Time to buy?
As encouraging as the recent performance has been, I remain unsold on the idea of adding this business to my portfolio. Its future seems dependent on factors beyond management’s control. And that is not a desirable trait, in my opinion.
Therefore, despite the recovery potential of the Rolls-Royce share price, I think there are better investment opportunities for my portfolio elsewhere.
