In October 2020, the Rolls-Royce (LSE:RR) share price dropped to 38p. That was its lowest point in a decade, which highlights the incredible impact the pandemic had on the firm.
Since then, Rolls-Royce shares have struggled to break the 100p barrier. Share prices are down 28% in 2022 and 18% in the last six months. In fact, Rolls-Royce ranks 79th in the FTSE 100 index for returns in 2022.
But investors have seen some positive price action recently. In the last month, shares are up nearly 9%. And I think investor sentiment surrounding the company is finally trending in a positive direction. While these are the strongest signs of a turnaround in years, can the Rolls-Royce share price finally gain enough momentum to make a comeback? Let’s find out.
Last call before take off
With civil aviation still witnessing a laboured return to profitability, Rolls-Royce has used the downtime to overhaul its R&D. I think one of the most promising projects to come out of the engineering firm in recent times is the record-breaking hybrid electric aircraft.
With the renewable energy lobby getting stronger by the minute, electric engines are all the rage. And Rolls-Royce expects its all-electric passenger aircraft, in development with Norwegian firm Widerøe, to enter the market within a decade. This could overhaul the aviation industry and Rolls-Royce would be the chief architect.
Another big development today for the company is the long-term TotalCare servicing deal signed with Vietnamese airline VietJet for its fleet. This is the largest recent order for Rolls-Royce, which has faced huge losses without engine upkeep contracts. And I see this deal as a strong sign that civil aviation is getting back on track.
Growing order book and revenue
Rolls Royce’s thriving power systems and defence wings could be the lifeline it needed. Green energy has become a huge driving factor behind governmental grants and private investments. The latest proposal from the UK government expects a £400bn inflow into the sector within the next 5-10 years.
And Rolls-Royce’s small nuclear reactor project could have a big role to play. Last year, the firm received an order intake of £3.3bn, 24% higher than 2020.
Rolls-Royce’s defence order book has also grown considerably in the last six months. The company has a close partnership with UK’s air defence systems and is currently developing anti-missile tech and hypersonic missiles. This comes after the recent push to bolster defence systems across the world after Russia’s attack on Ukraine.
Yes, Rolls-Royce’s huge debt of £5.1bn is a concern. Also, while civil aviation is recovering, losses from two years of grounded planes could weigh on the company for a few years. Also, these recent R&D projects are not cheap. In fact, the company is spending in excess of £1bn a year on exploring new tech. While this is a reason why I am bullish on the company, it could also quickly turn sour for investors.
This brings me to why I am awaiting Rolls-Royce’s half-year results, scheduled for 4 August. Evidence of positive cash flow could trigger a recovery in this reactive market. But if the large order book doesn’t translate to cash-in-hand, Rolls-Royce shares will continue to struggle. I am watching the results carefully and would make an investment if they are favourable.
