The Rolls-Royce (LSE: RR) share price continues to languish. It’s one of the few FTSE 100 shares that has remained stubbornly down close to its pandemic-crash levels, with little sign of any sustained recovery, so far.
There had been a couple of years of weakness prior to the arrival of Covid-19, so there were other issues. But the net result now is that Rolls-Royce shares are down 70% over the past five years.
That’s despite having weathered the storms of the past couple of years, and coming out looking in a half-decent position. At least that’s my judgment.
Debt
The company ended 2021 with £5.1bn net debt, which is far from ideal. But Rolls did report an underlying operating profit, and told us free cash flow was ahead of expectations. The key take for me from the board’s outlook statement: “We expect to generate modestly positive free cash flow in 2022, seasonally weighted towards the second half of the year“.
Will that happen? First-half results are due on 4 August, and free cash flow will be the first thing I look for. I’m optimistic, after the company recently reiterated its 2022 financial guidance.
I still think the short term will be tough. But I think long-term market sentiment is wrong. FTSE 100 companies are set to deliver an all-time record in share buybacks this year. And that just doesn’t happen if finances are tight.
Companies think their own shares are cheap now. But investors remain stubbornly resistant. And they’ve been pushing the gold price up all year instead.
Defence
Nobody can have failed to see the worsening of the defence outlook for Europe, after Russia invaded Ukraine. It’s not just bordering countries that are set to beef up their spending. No, there’s been a sweeping change across the continent.
It’s a change that’s surely going to be with us for a long time. And it’s got to help defence sector stocks. A look at the BAE Systems share price, for example, shows an upwards spike kicking off in February. Have investors forgotten that Rolls-Royce has a significant defence presence?
I also see a strong recovery in civil aviation around the corner. Demand is already growing, even though plenty of people are struggling to find air fares at reasonable prices. It’s all being held back by infrastructure problems right now. But they will ease.
Optimism
My optimism might be misplaced. And the balance sheet situation might continue to hold the Rolls-Royce share price back for a while longer. And above current debt, I suspect we’ll see investors wanting tighter cash control going forwards, having seen the risk that so many indebted companies faced when the pandemic arrived.
I still think a couple of things could kick off a healthy Rolls-Royce recovery though. One is the slowing of inflation. The other is improving market sentiment. And I’m convinced that both of those will happen. I don’t know when, but timing doesn’t matter for a long-term investor.