On 1 August, Rolls-Royce (LSE: RR) shares will likely swing one way or the other after the firm publishes its first-half results. I’d be very surprised if the high-flying FTSE 100 stock didn’t budge an inch.
Rolls is guiding for full-year operating profit growth in the 6%-25% range. If management says the firm is progressing towards the upper end of that guidance, then a 500p+ share price may be on the cards.
And if it’s more towards the lower end? Well, we could be looking at a much lower share price come Thursday night (1 August).
Supply chain issues
The City currently expects Rolls-Royce to post record revenue of £7.7bn for the first six months of the year. We don’t know how much profit will be generated from that, but CEO Tufan Erginbilgiç said in May he expected a “broadly balanced weighting for both profit and cash flow across the year“.
He’s also been mentioning supply chain problems quite a bit recently. According to the Financial Times, he said the the aerospace industry was suffering from “one of the worst supply chain environments it has ever experienced”.
This is leading to increased costs and production delays within the sector. Worryingly, Erginbilgiç said these issues could last another 18-24 months.
Is he forewarning investors about operational challenges to future financial performance? It’s a possibility.
On the other hand, these snags are being intensified by the rapid recovery of the aviation sector following the pandemic. This has led to a surge in aircraft orders, which is obviously good for Rolls-Royce.
In 2024, it has won new contracts with Indian airline IndiGo, which ordered 60 Trent XWB-84 engines, and Vietjet Air. These are both rapidly expanding airlines in Asia.
Worrying geopolitical developments
But there are other potential risks on the horizon. As I type, Israel has vowed to retaliate to a recent rocket attack on Israel-controlled Golan Heights, which it blamed on Hezbollah.
This has again raised fears about the crisis escalating into a region-wide conflict. Let’s hope not.
But if the worst happens, it certainly wouldn’t benefit global supply chains or international travel. And it demonstrates once again how certain risks are totally outside the company’s control.
Would I buy on a dip?
I’ve been looking to add to my holding in Rolls-Royce for a while. But with the stock trading on a forward price-to-earnings (P/E) ratio of 28, I’ve been reluctant to do so.
By current sector standards, that’s not outrageously expensive. But it’s also not cheap and reflects the strong growth momentum in the company’s core divisions.
In Civil Aerospace, large engine flying hours returned to 100% of 2019 levels in the four months to 30 April. This was driven by the recovery of international traffic and its growing fleet.
In Defence, Australian funding was confirmed for the AUKUS submarine programmes, which include Rolls-Royce reactors.
In Power Systems, the data centre market is creating growth opportunities for its power solutions due to higher demand from artificial intelligence and cloud providers.
Longer term, there are mini nuclear power reactors and opportunities from new single-aisle aircrafts.
Given all this, it’s hard not to be bullish. So if the stock sells off on 1 August, I’ll look to snap up more shares.
