It has been a rough 2022 so far for investors in Rolls-Royce (LSE: RR). Since the start of the year, the Rolls-Royce share price has tumbled by a third.
Normally that sort of fall can signal concerns about the outlook for a business. So, what is going on here – and is it a chance to buy more Rolls-Royce shares for my portfolio?
The falling share price
Although the shares have been dropping, it is worth recalling that they had staged a recovery in 2020. In October that year, they cost less than half of their current price. They then rallied and have touched prices as high as £1.60 over the past year, but have been sliding recently. However, the current price still reflects a big improvement on where the shares stood at various points nearly two years ago.
I think this partly reflects investor concern about the long-term outlook for aviation. After a dramatic drop during the pandemic, an increase in civil aviation volumes gave a boost to the shares. But a range of factors, from rising oil prices to airport staff problems, have dented hopes that civil aviation will simply go back to ‘business as usual’.
I think such concerns are probably overdone. In many key markets, flights are very busy again. That is good news for revenues at Rolls-Royce’s engine servicing business.
Other drivers for the shares
Not only that, I see additional reasons to be cheerful about the outlook for the Rolls-Royce share price. It is a leading defence supplier. Growing military spending should translate into higher revenues for Rolls-Royce. I see this as a structural shift, not a one-off change. So I expect defence spending in Europe to remain elevated for years to come.
The company has also been improving its financial performance. It is again profitable and generating free cash flows. Rolls-Royce has been trimming its cost base over the past several years. All of that bodes well for its future performance, in my view.
There are risks here. The development costs of new engine programmes could act as a drag on profits in coming years,. The company is working on new technology that does not rely on fossil fuels. Manufacturing can be a labour intensive industry and I also see rising wage bills as a risk to profit margins at the firm.
Buying and holding
With a market capitalisation of £7.2bn, I regard the company as attractively valued right now. I am a believer in long-term investing, and I think patience may be needed here. Ongoing weakness in civil aviation in some regions, combined with surging costs (including wages), could continue to dog the Rolls-Royce share price for a while.
But I am optimistic about the company’s prospects. I would consider acting on the current price to buy more shares for my portfolio.
