Rolls-Royce (LSE: RR) is in a funk. Again. The Rolls-Royce share price is trading at below 100p levels today after managing to hold up above these levels for much of the past month.
Much progress for Rolls-Royce
This is mystifying. The outlook for aviation is better now than it has been at any time in the past year. Supply and service of civil aircraft engines is Rolls-Royce’s biggest revenue source, so that is good news. Also, its other business segments are in a healthy place.
And Rolls-Royce also has plans in place for the future. It is in the process of forming a partnership with Cavendish Nuclear, an engineering company, to facilitate the development of Rolls-Royce’s small nuclear power plants. In another bid to support clean energy, the company is also set to launch the fastest electric plane.
To me, these look like developments with great potential as we move towards a cleaner, greener future. Whether or not they add to the company’s bottom line remains to be seen, but for now that is tomorrow’s question.
Why the share price drop?
So why the drop in share price?
I think one glaring reason is that the pandemic continues. It is true that vaccinations are happening speedily. It is also true that the intensity of Covid-19 has declined. However, it is equally true that coronavirus cases are on the rise. And while we are all looking forward to ‘Freedom Day’ next week, there is also a possibility that restrictions may come back after the summer. The worst affected from this ongoing uncertainty, is of course the aviation sector.
It is no coincidence then, that Rolls-Royce is hardly the only aviation related stock to decline in the recent months. FTSE 100 airline giant International Consolidated Airlines Group and the FTSE 250 low-cost airline easyJet, are other casualties of this uncertainty.
With constant change in expectations, I can see why investors appear undecided about the Rolls-Royce share price. I had predicted as much, when I wrote about it in May. My takeaway was that its situation is volatile, and that is how it has stayed. Even though by last month, it was beginning to look like I might have been wrong.
What would I do now?
So what would I do about the Rolls-Royce stock now?
I think it is a wait and watch situation for now. Unlike airline stocks, I have been particularly cautious about Rolls-Royce because even pre-pandemic its financial performance left a lot to be desired. So even if all goes back to normal, there is limited confidence in the company’s performance. This will also translate into limited share price increases.
Instead, if I want to buy stocks in the aviation pack, I think the likes of easyJet are a better buy for me. As a low-cost airline its bounce back can be faster.
