Shares in Rolls-Royce (LSE: RR) have been falling. The Rolls-Royce share price has tumbled 20% from its high last month. Over the past year, the shares have fallen 7%.
Below I consider why this might be. I also explain my next move.
Reopening prospects mixed
Over the past year, the shares have tended to do well when there is optimism about a return to international travel. That is because a large part of the company’s business relies on aircraft engines being used. The more they are used, the greater the demand for servicing.
Recently, news about reopening has been mixed. There has been a lifting of some restrictions in the UK, for example. But other markets like India may see fewer flights in the near future.
The focus on the timing of broad reopening is important. The sooner flight traffic returns to normal, the sooner the company should be able to staunch its negative cash flow. But I think it is something of a red herring. When assessing the Rolls-Royce share price, I find it helpful to focus on the broad pathway to flight resumption, rather than just a granular calendar view.
I expect travel to continue reopening overall even if the progression isn’t smooth. So I am optimistic that Rolls-Royce can return to free cash flow generation.
Lack of control
Another mitigating factor for the Rolls-Royce share price in my opinion has been the lack of any strong news from the company lately.
That reflects the fact that the key drivers for improved performance are external to the company. The directors can’t accelerate the demand for flights, no matter how beneficial that would be for the company.
Underlying investment case unchanged
Sometimes the stock market generates a lot of noise.
Compared to a month ago, I don’t think the future prospects for the Rolls-Royce share price have changed much. The company has not reduced its forecasts. The tough cost controls announced last year continue to take effect. The company still expects to stop bleeding cash in the second half of this year.
So if I was bullish about the Rolls-Royce share price prospects, I would see the recent fall as a buying opportunity. I still think the shares could reach 150p this year, as I previously explained.
That would be a 45% increase from today’s price in a matter of months. Yet I do not plan to take advantage of the recent share price fall. Why not?
Risks to the Rolls-Royce share price
The main reason I remain wary of buying Rolls-Royce shares is the lack of control I explained above. Currently the business prospects are mostly hostage to events. That means that even if the company makes its best efforts to prosper, the speed and scale of any recovery is substantially driven by external factors.
The main factor is the resumption of flights at close to pre-pandemic levels. While I do expect that to happen at some stage, the timing remains unknown. Delays constitute further risk to the Rolls-Royce share price.
I do think the share price could recover its recent losses and more. But for now, I am hunting for other shares that I think are less susceptible to demand shocks.
