Towards the tail-end of 2021, my biggest fear for travel-related companies like Rolls-Royce (LSE: RR) was the emergence of a new Covid-19 variant. Should we get an especially contagious one, I reckoned the stock could plunge again. And then Omicron showed up, but the Rolls-Royce share price has remained resilient.
Thankfully, the latest version of the virus appears to produce less severe symptoms. And it looks like its rapid sweep through the population could even bring the Covid end-game a bit closer. So what might 2022 have in store for Rolls-Royce, and is it time for me to buy as a recovery opportunity?
I do wonder if one of Benjamin Graham’s famous quotes might be especially apt this year. He said that in the short run, the market is like a voting machine. But in the long run, it’s like a weighing machine. Short-term movements are based more on popularity, while long-term movements depend on the underlying performance of a company.
I do believe we have seen a couple of years of investors following sentiment towards the Rolls-Royce share price. And I reckon a return to a fundamental re-weighing of the company this year would do a lot of good. It would certainly help me get a handle on the stock’s underlying valuation.
Rolls-Royce share price revaluation
I’m convinced it would be a mistake for any re-weighing to be based on Rolls-Royce’s past performance, though. That’s risky at any time, with the old adage that past performance is not a guide to future performance worth repeating. No, two things have fundamentally changed. One is the market. I think it will be a long time before air travel volumes get back to 2019 levels, if they ever do.
The other major change is to the Rolls-Royce balance sheet. The company raised the cash needed to keep its head above water during the crisis. But net debt soared to more than £3bn at the halfway stage in 2021, up from approximately £1.5bn at the end of 2020. Still, the company’s December update reported net cash inflow in the third quarter.
Making good progress
Disposals were progressing too, having reached a total of around £2bn. So the company already looks to be making potential inroads into that debt pile. But the final picture of the post-pandemic company, in terms of assets, liabilities and operational capacity is still far from certain.
If full-year results, due 24 February, show improving progress towards debt reduction, I think that would help. It’s probably still too early to read anything into passenger numbers, though.
Waiting for the figures
The biggest problem for me is that it’s hard to find any useful figures right now. With a full-year loss recorded in 2020, historic earnings and P/E are pretty meaningless (and even less reliable than in more normal times).
So is it realistic to hope the Rolls-Royce share price will skyrocket in 2022? I do think there’s a chance it could happen. But whether it will is way too risky a question for me to gamble on. I’ll keep watching.