During the past 12 months, the Rolls Royce (LSE: RR) the share price has essentially moved sideways. The stock has returned -1.5% since the same period last year. By comparison, the FTSE All-Share Index returned 22%.
This is a somewhat unfair comparison because the pandemic has hit Rolls-Royce badly. It suffered one of the biggest drops in turnover and profitability of any major UK company.
It makes more sense to compare the performance of the Rolls-Royce share price to that of other companies affected by a pandemic such as AGI, easyJet and Tui. But even relative to those stocks, Rolls has underperformed.
The three companies described above generated 11%, 24% and 47% respectively in the last 12 months. Tui achieved this performance despite being bailed out three times by the German government during this period.
Looking at these numbers, I wondered, what is going on with the Rolls-Royce share price?
Rolls’ biggest division is its aerospace business. This is the sale and maintenance of engines for the civil aviation industry. The company is paid according to the number of flight hours accumulated by its machines. Therefore, when the aviation industry was effectively brought to a standstill around the same time last year, the group’s revenues plunged.
Since then, the industry has started to recover. Global air traffic is currently approaching two-thirds of 2019 levels. The improving outlook for the industry has had a positive impact on the outlook for Rolls. The company expects to achieve breakeven cash flow in the second half of the year. This should draw a line on its pandemic losses.
Unfortunately, it appears that the market is skeptical about the company’s ability to achieve this goal. This seems to be the main reason why the Rolls-Royce share price has underperformed.
It wouldn’t be the first time the company has missed targets. In the past, the group has repeatedly overcompromised and underperformed. Therefore, I think the market does not believe in the leadership outlook.
Is Rolls-Royce share price a buy?
I think this could be an opportunity for risk tolerant investors. Despite its prospects for improvement, the title still looks cheap. Although there is always the risk that the company will miss management growth targets.
However, I would buy the stock for my portfolio today as part of a speculative raise. However, I am well aware that this is not a risk free investment. I think there’s a good chance the company is underperforming this year. If so, the stock could continue to languish.
Therefore I would only buy a small speculative position for my portfolio. While I believe the Rolls-Royce share price has the potential for a rally, the outlook for the global travel and aviation industry is incredibly uncertain. Unfortunately, there is nothing the company can do in the face of this uncertainty.
The post What’s up with the Rolls-Royce share price? first appeared on The Motley Fool UK.
Rupert Hargreaves has no position in any of the stocks mentioned. The Motley Fool UK has no position in any of the stocks mentioned. The opinions expressed on the companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of ideas makes us better investors.
Motley Fool United Kingdom 2021