Rolls-Royce (LSE:RR) shares have surged over the past month. In fact, the stock is up 30%. So why is this troubled engineering giant now outperforming the rest of the FTSE 100?
Resurgence
Rolls-Royce shares rallied after a positive trading update coincided with the accession of a more fiscally responsible politician to the premiership.
In its latest reporting period, Rolls said recent market turmoil and inflation had not impacted cash flow, leading it to hold its annual guidance.
The firm pointed to a recovery in the air travel industry. The company, which gets paid when its engines are airborne, said hours flown by its customers were now at 65% of 2019 pre-Covid levels.
Outgoing chief executive Warren East also noted that the firm had paid off £2bn in debt with proceeds from the sale of its ITP Aero unit. The debt had been accrued during the pandemic as its civil aviation segment tanked.
The accession of Rishi Sunak to PM has certainly helped. His promise of fiscal sensibility following six weeks of recklessness under Liz Truss has stabilised markets. Equally, interest rates will likely peak lower under Sunak. This could be seen as beneficial for the high indebted engineering firm.
Have I missed my chance to buy?
I already own Rolls-Royce shares, but its always nice when I can pick up more at a knockdown price. But at 90p — down 36% over the year — I still think the Rolls-Royce share price has some distance to climb.
There are, of course, challenges. With the sale of ITP Aero and other units, its now a smaller business and may struggle to generate pre-Covid revenues for some time. Equally, Rolls’s debt repayments will likely have a negative impact on profitability going forward.
However, on a positive note, all three business segments are seeing an improvement in underlying performance.
While large Engine Flying Hours (EFHs) are around 65% of pre-pandemic levels, here there has been a 36% growth in year-to-date engine hours compared to 2021. With Covid restrictions still to be removed in parts of the world, we should expect further growth in 2023.
Meanwhile, the power systems division — which provided 25% of overall revenue last year — has seen orders grow 53% to £2.1bn over 12 months.
Defence is the third segment and with Putin waging war in Ukraine and western leaders vowing to increase military spending, you’d think it would be doing well. Evidence suggests it is, but Rolls has said it expects “no material benefit” from increases in government defence budgets this year.
So have I missed my chance to buy more Rolls stock? I don’t think so. I appreciate there will be some challenges and, as a shareholder, it might be a while before I receive dividends again. But I see this engineering giant pushing much higher as civil aviation continues its recovery.
