This time last year, I thought we needed a number of key things to happen before we’d see a solid Rolls-Royce (LSE: RR) share price recovery.
We’ve seen positive developments against these key issues since then. And last summer, I’d have predicted a considerably higher Rolls share price than we see today, had I known the progress it was about to make.
But here we are now, with the Rolls-Royce share price still looking like this:
Airborne again
We needed pandemic flying restrictions to end. Without flights, airlines don’t put any mileage on their Rolls-Royce engines, and the company doesn’t get its per-flying-hour payments.
That has pretty much settled now, and airlines are getting back up where they belong. British Airways owner International Consolidates Airlines expects to get passenger capacity up to 90% of 2019 levels by the fourth quarter.
Budget airline easyJet, meanwhile, saw passenger numbers in April and May reach seven times their 2021 levels. Both companies are already ordering new aircraft too.
Cash flow
I also wanted confidence in the company’s balance sheet. And I think I have that. Rolls had to raise a lot of new capital to survive the pandemic years, and one of my biggest fears was that it might need to come back to the market for more.
But the company ended last year with a positive operational profit, and reported cash flow improvements ahead of plan. It looks to me like there’s enough liquidity. And in its most recent trading update, Rolls told us that its financial performance was still in line with expectations.
Results in August
The other big thing was debt, and Rolls is working to get that down. The first half of this year should see the company raise £2bn in disposals which will be used to repay debt.
First-half results are due on 4 August, and I think they could make a difference to the Rolls-Royce share price. Providing there’s no bad news, that is.
A year ago mind, we couldn’t have predicted the war in Ukraine. Or the effect it would have on already-stretched global supply chains and on worldwide inflation.
So what more do I think it will take to get the Rolls-Royce share price moving back upwards in the second half of this year? I reckon the fundamentals are looking good, and it’s all down to investor confidence now.
Risk affecting sentiment
Investors just don’t like taking risks in times like these. And with Rolls-Royce shares on a forecast price-to-earnings (P/E) ratio of around 50 for the current year, it makes it look like there’s plenty of risk. And there definitely is, as we really don’t know what today’s horrible economic outlook might really bring.
But at least that P/E is positive, which means actual profits. And forecasts have it dropping as low as around 12 by 2024. That’s still a long way out, of course. And the events of this year show how much uncertainty there can be just 12 months ahead.
But I really do now think the Rolls-Royce share price could end this year significantly ahead of today.