Rolls-Royce (LSE:RR) shares have rallied since late summer. This particularly volatile FTSE 100 stock is down 1% over 12 months, but is up 49% over six months. But this is nothing compared to the longer-term fluctuations in the share price. Over three years, the stock is down 50%.
So, why is this? And why do I think the stock can continue its recent surge upwards?
Covid challenges
Covid-19 is largely responsible for Rolls’s fortunes over the past three years. Engine-flying hours (EFH) account for a large proportion of the firm’s income. And, as the pandemic saw air traffic collapse, income from EFHs tanked.
The engineering giant recently announced that large EFHs were around 65% of pre-pandemic levels in the four months to the end of October.
Despite this, the other two business segments, power systems and defence, performed well.
What’s changing?
Liz Truss’s inflation-provoking growth plans inflamed a global issue, further raising concerns about borrowing costs for debt-ridden stocks like Rolls-Royce. But the economic climate has undoubtedly improved since then.
And there are further reasons for positivity, which I think should drive revenue upward in the coming years.
Tailwinds in aviation:
China’s reopening represents a major boost for Rolls and its EFHs. In China, wide-body planes with two aisles and Rolls-Royce engines are often used for short-haul routes. But in 2022, flying hours remained around 30% of pre-pandemic levels. It’s worth noting that Rolls’s engines tend to be used in wide-body jets.
New orders:
Some 13,700 aircraft were mothballed during the pandemic — many of which are no longer fit for service. As such, with demand for flying returning, many airlines are procuring new aircraft. Airlines like Air India, United, and American placed sizeable orders for new jets in 2022. The first intends to grow its fleet by 500.
Fresh demand has been highlighted by easyJet this week. The firm noted a 161% year-on-year increase in customer bookings for summer 2023.
Doubling my money?
Estimating how much Rolls should be worth is challenging as cash flow from operating activities has been negative in recent years. However, a discounted cash flow calculation, looking at cash flow over 10 years, suggests the stock could be undervalued by up to 50%.
The data infers a share price range of 88.8p-238p. The sizeable variation reflects challenges around forecasting what will happen to cash flow in the coming years.
As suggested, and despite the £4bn debt burden, I’m bullish. I’m expecting to see growth in all three segments as demand for air travel returns, increasing emphasis is put on fuel efficient and carbon neutral power systems, and as geopolitical tensions increase defence spending.
I’m already a Rolls-Royce shareholder. I’ll be buying more of this stock at 112p because I contend it could really outperform the index this year. Doubling my money is certainly possible, but I’m not expecting that in the near term.
The post Rolls-Royce shares: could I double my money amid clearing skies? appeared first on The Motley Fool UK.
Could the ‘death of print magazines’ expose another new share pick?
We think print magazines are going extinct.
Marie Claire, NME, FHM and Loaded have all joined the choir digital. Many more famous titles have been wiped out entirely. However, all that wealth has NOT been destroyed. Instead, it’s moving to a hidden area of the industry most people never see.
This company in particular is greedily swallowing the spoils.
These past 5 years – while print readership has sharply declined – its revenues surged by 880%, and at a faster compounded rate than Google and Amazon! Meanwhile, profit margins have surged over 20X. Even if this growth doesn’t continue, we think it’s in a stronger position than ever before.
And thanks to the recent market mayhem, its shares are down over 50% from their previous highs. Now might be a rare second chance to grab a share of this monstrous growth.
All is revealed in this special report, ‘One Top Growth Stock from The Motley Fool’.
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()
More reading
- 3 cheap shares I bought for high yields
- How I’d invest a £20,000 Stocks and Shares ISA to build wealth
- Owning Lloyds shares has been a long-term disaster. What now?
- 6.2% yield! Should I buy this FTSE dividend stock for passive income?
- How I’d invest a £20K ISA to target £1,600 in annual passive income
James Fox has positions in easyJet Plc and Rolls-Royce Plc. The Motley Fool UK has no position in any of the shares mentioned. 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.