The Rolls-Royce (LSE:RR) share price has been volatile over the past couple of years. The pandemic wasn’t kind to this FTSE 100 firm, but recent news and price movements indicate that it’s on a better track, something I predicted a few weeks back. Let’s take a closer look.
More flying hours, more revenue
I first bought shares in the company – a jet engine and power systems manufacturer – in the midst of the pandemic. Since then, I’ve added to my position during market dips. Only two weeks ago, for instance, I bought more shares at 80p.
Over the past year, the share price has performed comparatively well, dropping only 1.5%. In the last six months, however, it’s down 28%. At the time of writing, the shares are trading just shy of 90p.
The real reason the business was pummelled, however, was due to dramatic falls in revenue and cash flow during the pandemic. With the vast majority of flights grounded, fewer jet engines were being used and demand for new products dried up. This all contributed to a £294m pre-tax loss in 2021.
Just last week, however, the company announced that it was in advanced talks with European aircraft manufacturer Airbus to collaborate on a new series of widebody aircraft. This is the first indication that demand within the civil aerospace segment is recovering.
Any deal struck with Airbus could yield significant revenues and profits. Furthermore, civil aerospace flying hours increased over 40% in the first quarter of 2022, year on year. This means that the business is once again deriving serious revenue by virtue of the fact that its engines are racking up more hours in the sky.
There’s always the risk, however, that another pandemic variant could put a stop to international travel and result in declining demand for jet engines once again.
Longer-term view
As international travel continues to reopen, I think Rolls-Royce shares may only go up. This is all rather near term, however. For long-term growth, I look to the firm’s New Markets segment.
Most recently, the company was awarded around £3.4m by the UK government to develop a Direct Air Capture System. This will be developed over the coming years, but it could remove around 100 tonnes of carbon dioxide from the atmosphere per annum.
With governments around the world looking to trim greenhouse gases, this technology could generate significant revenue in the future.
The business is also in the early stages of developing its Small Modular Reactors (SMRs). While it’s still shortlisting sites on which to build these reactors, it’s quite clear that the company sees the solution to the energy crisis in nuclear power. This could produce revenue by the late 2020s.
Overall, I think Rolls-Royce shares could be heading for clearer skies. My position is currently quite big, so I’ll wait for any short-term market dips to improve my average weighted price.