As fears over Covid-19 steadily ease, I think Rolls-Royce’s (LSE: RR) share price could be about to soar.
The FTSE 100 engine builder’s shares are 20% more expensive than they were this time last year. But Rolls-Royce’s share price slumped towards the back end of 2021 as concerns over Omicron jumped. It’s also failed to gain any serious momentum since then. In fact, Rolls-Royce is cheaper than it was on 1 January.
This is despite a sharp fall in global coronavirus cases and the lifting of travel restrictions in many regions. So is the Rolls-Royce share price due for a re-rating as travel bookings rebound strongly? And should I buy the FTSE 100 firm for my stocks portfolio?
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Travel sector bounces back
As I say, major travel operators are reporting a strong rebound in flight bookings as pandemic rules steadily ease. It’s raised the prospect that flying hours for Rolls-Royce’s engines could be about to soar (they registered at just 50% of 2019 levels at the end of last year).
TUI, Ryanair and easyJet are a few major travel operators that have recorded strong ticket sales in recent weeks. The chief executive of easyJet, Johan Lundgren, even also said that “we see a strong summer ahead” and that strong pent-up demand will see the airline “returning to near 2019 levels of capacity.”
Encouragingly for Rolls-Royce this is already translating through to improved confidence in the aerospace sector. Last week, Airbus said it was in discussions with suppliers to lift production of its A320 model beyond 2023, from current levels of 65. It also confirmed plans to deliver 720 aircraft this year, up from the 611 delivered in 2021.
Is Rolls-Royce’s share price cheap enough?
As a long-term investor, there are other things about Rolls-Royce I find highly appealing too. The geopolitical landscape is becoming more uncertain and troubled as the unfolding crisis over Ukraine illustrates. So I expect sales at Rolls-Royce’s defence business to remain pretty robust too.
I’m also encouraged by the company’s plans to build small-scale nuclear plants across Britain. This could generate huge returns as the world transitions towards low-carbon energy sources.
All that being said, I’m not tempted to buy Rolls-Royce shares just yet. My chief concern is the huge amount of debt the engineer has on its books (£4.9bn as of June).
However, asset sales and cost-cutting have been coming along nicely to ease the pressure on its balance sheet. Earlier this month, it sold its share in AirTanker Holdings for a cool £189m.
But these huge debts still have the capacity to damage Rolls-Royce’s growth plans and delay the payment of decent dividends to shareholders.
I find Rolls-Royce’s debt particularly concerning as the pandemic rolls on and new travel restrictions can’t be ruled out. In this scenario the FTSE 100 firm could take on new debt or tap investors for more cash to survive.
The Rolls-Royce share price is cheap — at 119p it carries a forward price-to-earnings growth (PEG) ratio of just 0.2 — but I’d still rather buy other UK shares right now.
