The returns Rolls-Royce (LSE:RR) shares have generated since the end of the pandemic are hard to ignore. Over the last five years, the stock’s up 728%.
That’s enough to turn a £10,000 investment from April 2020 into £82,812 today. And while the end of Covid-19 travel restrictions have been a big help, there’s more to it than this.
Rolls-Royce
It’s easy to attribute Rolls-Royce’s success to the recovery in travel demand. And there’s no doubt an increase in engine flying hours has been a big part of the story.
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Increased demand for engine servicing has caused a recovery in revenues and profits. This in turn has allowed the company to reduce the debt on its balance sheet, bringing down interest costs.
Rolls-Royce has gone from paying £476m in interest on its borrowings in 2022 to £245m in 2024. And this has further boosted profitability and free cash flow generation.
It’s too simplistic though, to say the stock has gone from 86p to £7.15 over the last five years because of the end of the pandemic. Not every business that was affected in the same way has managed a similar recovery.
Carnival
Carnival‘s (LSE:CCL) another stock that struggled badly during Covid-19. And while the share price is 104% higher than it was five years ago, it hasn’t reached Rolls-Royce levels.
Carnival’s operating profits in 2024 were higher than they were in 2019. But the firm has almost three times as much long-term debt, which means a lot of that income goes on interest payments.
As a result, earnings per share are around a third of what they were before the pandemic. And that’s why the stock hasn’t managed the same sort of recovery as Rolls-Royce.
I think Carnival’s performance is an indication that Rolls-Royce’s recent success hasn’t just been the result of travel restrictions lifting. There’s been something more going on.
CEO
As well as the effects of the pandemic unwinding, Rolls-Royce has benefitted a lot from a dynamic CEO. Tufan Erginbilgiç has done a lot for the firm since joining from BP in 2023.
Changes have included shifting away from assets that generated weaker returns, such as ITP Aero (sold) and Rolls-Royce Electrical (ceased). This has improved the firm’s overall returns.
Erginbilgiç has also renegotiated Long-Term Service Agreements where the company services engines for a fixed fee. These can be unprofitable if costs exceed the value of the contract.
Rolls-Royce’s performance has been driven in large part by the firm’s internal transformation, not just an easier trading environment. And this is important from an investment perspective.
Buy low?
Rolls-Royce shares have been outstanding over the last few years. And Covid-19 restrictions lifting by itself doesn’t fully explain why this has been the case.
This has however, been an important part of the story and I think the place to look for opportunities right now is in sectors that are going through short-term challenges.
That’s what I’m doing. I’m not saying the Rolls-Royce share price can’t go higher from here, but I don’t see this as an obvious time to be thinking about buying the stock.
