What on earth’s going on with the Rolls-Royce share price lately?

This investor takes a look at why the Rolls-Royce share price took a dip at the beginning of September after rising 11% in August.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Aerial shot showing an aircraft shadow flying over an idyllic beach

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Rolls-Royce (LSE: RR) share price continued its incredible ascent in August by powering above 500p. This meant the FTSE 100 stock had surged over 600% in just 22 months!

However, after an 11% rise in August, the start of this month has brought significant turbulence. Yesterday (2 September), the share price dipped 6.5% to 464p. As I type though, it’s rebounded 3.1% to 478p.

What’s going on here?

Grounded aircraft

Yesterday’s decline followed an incident where a Cathay Pacific Airways flight from Hong Kong to Zurich experienced issues, forcing it to circle twice over the sea to dump fuel before landing safely.

The A350-1000 aircraft was powered by Rolls-Royce’s XWB-97 engines and the problem appears to be related to a fuel nozzle. In response, numerous flights have been cancelled by Hong Kong’s Cathay Pacific as fleet-wide precautionary checks and repairs are carried out.

This does highlight how problems like this can suddenly crop up and cause investors to panic. If there was a major engine architecture fault, the financial liability would likely be significant.

Indeed, Rolls took a huge hit in 2018 when it had to inspect and repair engines after discovering cracks in turbine blades.

Fortunately, this doesn’t appear to be anywhere near as serious. The airline operator says it expects the grounded planes to be out of service for just “several days“. Hence the rise in Rolls-Royce shares today.

Incredible business performance

Back in August, the firm won an order from Cathay Pacific for 60 Trent 7000 engines. It will make the airline the world’s largest operator of this engine model, which is expected to reduce emissions by 14% in combination with Airbus‘s A330-900 aircraft.

This announcement builds on incredible commercial momentum at the company. In H1, we saw financial improvement across all areas.

Source: Rolls-Royce H1 2024 results presentation

By the end of 2024, management expects to have cumulatively delivered more than 75% of its mid-term operating profit target (£2.5bn–£2.8bn).

Meanwhile, net debt has been reduced to its lowest position in more than five years, which has enabled the return of the dividend.

This progress is reflected in the stock’s valuation. The forward price-to-earnings ratio is around 28 (a hefty premium to the FTSE 100). So there’s still a lot of optimism baked into the share price.

The growth story still looks strong

On the engine issue, brokers don’t seem overly concerned for now. Deutsche Bank, for example, reckons the financial impact will be manageable: “While the news raises some concerns, our preliminary analysis is that the financial liability could be contained. Hence, our positive view of the equity story is unchanged.”

The bank maintained its own target price of 555p, which is 16% above the current level.

Looking ahead, I’m still bullish. The number of aircraft is expected to double over the next 20 years due to surging global travel. This growth will likely lead to a significant increase in Rolls-Royce’s engine fleet and the lucrative aftermarket services that come with it.

Last month, I bought more shares for the first time in 18 months. I’m happy to hold that position for the next few years as this long-term growth story hopefully plays out.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ben McPoland has positions in Rolls-Royce Plc. The Motley Fool UK has recommended Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

A UK share and an ETF that could soar following Trump’s election win

Donald Trump's White House return poses huge uncertainty for the global economy. But this UK share and ETF could gain…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

2 FTSE stocks that demonstrate the best (and worst) of the AIM market

Our writer looks at the performance of two very different FTSE stocks that highlights the pros and cons of investing…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

With a P/E ratio of 8 and selling for pennies, is this FTSE 250 share a bargain?

Christopher Ruane digs into a cheap-looking FTSE 250 share that sells an iconic product and considers whether it's really a…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Could the stock market crash in 2025?

Our writer considers some possible drivers for a stock market crash. Rather than try to time it, he's wondering how…

Read more »

Investing Articles

Why do so few people build a passive income?

For those putting a little money away, far more choose savings accounts over aiming to make a passive income from…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

Could putting £20,000 into FTSE 100 stocks get me monthly passive income of £2,756?

The FTSE 100 is full of dividend shares offering generous returns. Our writer considers how much income he could generate…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing For Beginners

At fresh 52-week lows, is this the best value stock in the FTSE 250?

Jon Smith considers a value stock that's currently at low levels due to recent news, but he feels it shouldn't…

Read more »

Investing Articles

The Burberry share price rises on takeover rumours. But I still don’t want to buy

Speculation about a possible takeover sent the Burberry share price higher. However, our writer’s steering clear of the luxury fashion…

Read more »