Whenever I have covered the Rolls-Royce (LSE: RR) share price, I have always tried to highlight the company’s potential.
I think its long-term potential is highly exciting, although I am also aware that getting past short-term headwinds will be a challenge. The pandemic has devastated the group’s business model. It has cut thousands of jobs and taken on a lot of debt to try and survive.
The good news is, the company now seems to be past the worst. And I think this recovery could send the stock back to 300p. In this scenario, the Rolls-Royce share price could turn an investment of £1k into £2.5k. That would be a 150% return on my money.
Improving outlook
After two years of disruption, it now looks as if Rolls-Royce is back on track. Over the past couple of months, several positive updates have helped improve sentiment towards the business. These updates include the sales of business divisions to raise cash, the recovering aviation market, and the funding of Rolls’ new nuclear power plant business.
This last point is something I am highly excited about. Rolls’ expansion into the nuclear power business should help it diversify away from the aviation sector. The latter can be highly cyclical, as we have seen over the past year. Therefore, by expanding into power generation, the group should stabilise its income streams. That may also attract a different class of investors.
Still, it will be at least a decade before this division is up, running, and generating sales. In the meantime, the company will continue to depend on aviation sales.
On this front, there is more good news. Airlines have started to order new plans in the past six months. This shows most are still committed to expansion plans after the disruption of the pandemic. This is fantastic news for Rolls, which depends on the income from the service contracts it sells with its new engines.
Rolls-Royce share price headwinds
Despite all of the above, the company will have to navigate many challenges before the stock can return to 300p. These include competition and the general disruption caused by the pandemic. Although the aviation sector is starting to recover, some analysts believe it could be the middle of the decade before the industry has completely moved on.
Nevertheless, as the business starts to rebuild and looks to diversify, I think the chances are improving and the stock can return to its pre-pandemic high of 300p, or more.
That is the main reason why I would buy the shares for my portfolio today and could turn an investment of £1k into £2.5k, or more.
The firm has plenty of challenges to overcome in the years ahead, but I think the Rolls-Royce share price has huge recovery potential in 2022 and beyond.