Rolls-Royce’s share price has been sliding. Could it be that today’s news is a bullet in the arm?
Image source: Rolls-Royce plc
A few years ago, Rolls-Royce (LSE:RR) has been a spectacular stock market performer. Over five years, the price went up and up 953%.
Lately, though, things haven’t been looking so good. When the market closed on Wednesday (April 29), the price of Rolls-Royce was 19% lower than it was in the first week of last month.
Another reason for the fall is investor concern about what the Middle East conflict could mean for jet fuel prices and demand for aviation. That’s important to Rolls-Royce because of its large civil aviation division.
As we have seen in this pandemic, a reduction in flight hours can mean a decrease in the need for engine operating income. When passenger demand declines or industry economics change due to significantly higher input costs, airlines tend to reduce spending on new aircraft, reducing engine sales.
With the Annual General Meeting scheduled for today (30 April), Rolls has issued a trading statement to let shareholders know how the company is doing.
A confident company in a challenging marketplace
This statement is clearly intended to send a reassuring message. Rolls conversations”strong start to the year”, and emphasizes that company structure and culture “better equipped to respond to changes in the external environment“.
Specifically, while Rolls recognizes that the Middle East conflict has created uncertainty for its industry, it says it expects “to fully mitigate the current financial impact of disruption to our business“.
Nobody has a crystal ball, of course, so when Rolls-Royce clearly refers to “at the moment” financial impact, it gives itself the freedom to change its view if things take a turn for the worse.
Overall, the message is that the company continues to expect to achieve its goals for the full year 2026.
In recent years, being a consistent and reliable performer has helped Rolls-Royce’s share price rise. I expect today’s statement could help support the price in the coming days and weeks as investors take comfort in its reassuring voice.
In early trading today it was up about 1%.
Not out of the woods – and not cheap, either
Credit to Rolls-Royce for managing the rapidly evolving situation as expected will allow it to continue to deliver on its annual forecasts. Confirmingly, it said in a statement that “demand for new widebody aircraft remains strong“.
However, the reality is that risks such as low demand for civil aviation are beyond the company’s control. If the situation worsens from here – for example because higher fares lead to passengers deciding to fly less – the country’s current crisis and its economic implications could hurt Rolls-Royce more than it currently expects.
That may not matter if the Rolls-Royce share price gives me an extra margin of safety. But it closed yesterday at 37 wages.
I don’t think that looks cheap. My concern remains that, if this problem continues, it could end up hurting Rolls’ earnings more than currently thought.
Today’s news may help boost the stock price. But I don’t think it has removed the short to medium term risk for the company. I have no plans to buy yet.
