Will the Rolls-Royce share price take off?

For 2020, most of its income came from selling and maintaining commercial aircraft engines. This is encouraging news as travel restrictions ease, and the travel sector seems to be heading back to pre-pandemic levels. Additionally, I think a critical factor that could help the Rolls-Royce share price is diversification of its revenue to more industries. Its Defence and Power Systems divisions now represent 56% of its revenue, up from 44% in 2019. 

Following the group’s latest financial results, City analysts predict the business will report a profit of almost £400m in 2022. Significantly, Rolls-Royce raised approximately £5bn last year to help shore up its balance sheet, including £2bn from investors. With no debt maturing until 2024, I think there’s room for the company to start generating cash again. 

I think the Rolls-Royce share price may increase from the company’s recent development in electric aircraft. In fact, in November 2021, an all-electric aircraft built by the company broke a world speed record. Following this achievement, CEO Warren East said, “the advanced battery and propulsion technology development for this program has exciting applications for the Advanced Air Mobility market”. This project has reported pre-orders from some of the largest airlines in the world, and I think this could help propel the Rolls-Royce share price higher. 

Supply concerns

Earlier this week, Rolls-Royce has confirmed it has ceased trading with Russia, and the company will pause all activity with the Russian commercial airline Aeroflot. With Russia accounting for 20% of its titanium and around 2% of its revenue, I don’t think this will severely impact Rolls-Royce. However, it’s important to note that titanium is widely used in engines, fasteners, and other aircraft parts because of its strength, lightweight, and resistance to corrosion. 

In a recent earnings call, East said the company has been stockpiling and diversifying its sources for titanium. Shortages could magnify existing supply-chain issues, threatening production for Rolls-Royce and other major plane makers. Concerns over supplies of titanium and other metals over the coming months may add to supply constraints that existed before the Russia-Ukraine conflict. 

In my view, the Rolls-Royce share price could make long-term progress; however, I don’t believe it’s a bargain right now. Firstly, the conflict in Eastern Europe hasn’t helped. Furthermore, a primary long-term concern is the announcement of the departure of East, who has led the company since July 2015. Finally, it still has a huge debt pile at £5.2bn, and it has not paid a dividend to shareholders in years. I will wait to see what happens with the leadership before buying any shares for my portfolio. 

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Sabir Husain has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Is the Evraz share price in bargain territory?

It’s clear why the share price has plummeted this year after recent events involving Russia and the West. Imposing significant sanctions, such as cutting off Russian banks from the SWIFT payment network, makes managing and developing mining sites incredibly challenging.

Despite this, here’s why I think it’s worth looking deeper into this stock. The core products for Evraz include steel, coal, vanadium and various raw materials. Vanadium is particularly interesting as it’s used to increase the energy density and voltage of car batteries. Demand for vanadium is growing with the electric vehicle trend, and the price of vanadium has doubled over the last few years. Finally, many of the other core products for Evraz have increased in demand recently.

In North America, Evraz is the number one producer of rail, large-diameter pipe and steel plates. With steel prices increasing recently due to supply constraints, I think this could still be an area of growth for Evraz. However, I believe Western sanctions would likely cause most of the development from its steel operations to happen outside of North America.

Around two-thirds of its revenues are currently being generated outside of Russia, and the company doubled its free cash flow last year. Meanwhile, the company increased its net income in 2020 by 158.78% and a massive 233.6% for 2021. With a net income of £2.21bn and a free cash flow of £1.79bn for 2021, I think the business model has been as strong as steel over recent years.

Political risk

Regardless of what I think about the previously strong financials, I think it’s important to remember that in 2022, the Evraz share price has fallen like a knife through butter rather than steel.

The short-term future of the share price seems to be heavily linked with the geopolitical situation in Ukraine. With 39% of the company’s sales total coming from Russia last year, it isn’t easy for me to see how the Evraz share price can return to its previous highs any time soon. Additionally, the largest shareholder is Russian oligarch Roman Abramovich, who’s suffering from significant sanctions.

It’s difficult for anyone to predict political risk, and I think there’s too much uncertainty surrounding the company at the moment. Despite the Evraz share price substantially dropping this year, I’m avoiding it until the situation stabilises in Eastern Europe. A drop of over 80% in less than three months is a trend that I’d rather not fight against for the moment.

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Sabir Husain has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Helium One share price to balloon?

Since the beginning of 2022, the HE1 share price has ballooned up by over 40%. I think this is partly because global demand for liquid helium is estimated to grow at a compound annual growth rate of approximately 3%. In addition, the company has three major projects in Tanzania, including its Rukwa project, which is one of the largest known primary helium resources in the world.

I believe the Helium One share price will be greatly impacted by an increase in demand for applications where other gases cannot be substituted. Purging is one of those applications: at 6% of Helium One’s market, I think the demand for purging is likely to increase as the space industry is forecasted to grow. Superconductivity and basic laboratory research are also applications where helium has a unique role to play.  

In contrast, many applications do not require the unique properties of helium to achieve the desired result. For example, welding, which makes up 17% of the Helium One market, is replaced by argon in Europe, while the United States uses helium. Also, fibre optics manufacturing at 6% of its market can often be substituted by hydrogen, as high thermal conductivity is the key property for this use case. In these examples, economics, safety, and legislation can influence the choice of using helium or other gases.

HE1 share price concerns

Helium One burnt a little over £5m of cash last year, which was approximately 8% of the company’s market value. Despite its fairly solid cash runway, I believe many investors will be concerned about how easily it could raise more cash.

I think another concern is the fact that the Helium One share price declined over 60% in less than a year, and its net income declined by 113.7% in 2021. This helps explain the roller-coaster journey for the Helium One share price over the last few years.

The Helium One share price exploded up like a rocket by 294% from the start of 2021 to 2 August. From here, however, the balloon burst and its share price dropped 82% within the month! Overall, I regard Helium One as a speculative exploration company that requires high-risk tolerance. However, I believe it has improved its commercial model, therefore I’ll be watching Helium One shares very closely before I decide whether to take the plunge and add them to my portfolio or not.

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Sabir Husain has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The FTSE 100 company I’m highlighting today is Ocado (LSE: OCDO). It has a £9bn market cap and its operating segments include retail, UK solutions & logistics, and international solutions. Most people are familiar with Ocado from its retail segment, which provides online grocery and general merchandise offerings to customers in the UK.

Ocado to outperform the FTSE 100 in 2022?

In a research note on 23 February, Royal Bank of Canada put a target price of 1,700p on Ocado, which is 43% higher than its current share price. If Ocado hits this within the next few years then it will almost certainly outperform the FTSE 100.

Bear in mind that one of the biggest drags on the FTSE 100 index last year was Ocado, as its shares fell 11.6% after it posted steep losses. In total, Ocado shares declined 27% last year; however, in 2020 it went up 78.8% while the FTSE 100 returned a loss of –14% for the year.

Highly innovative FTSE 100 technology companies often require substantial profit reinvestment to continue growing through research and development. This is no different with Ocado, as it continues to develop its cutting-edge robotics and artificial intelligence technology. Recent development in its robotics is largely down to joining forces with Kindred Systems and Haddington Dynamics.

Ocado’s robotics are used for a wide range of activities including:

• Developing smart robotic systems to make them more efficient at picking and packing customer orders.
• Designing bots that fulfill orders in Ocado’s customer fulfillment centres.
• Enhancing picking stations and developing a grid that’s tolerant to seismic events.

Ocado designs, builds and operates smart mobile machines, which operate by collaborating to achieve unprecedented efficiency at picking and packing items. Artificial intelligence and machine-learning algorithms are also powerful tools being utilised by the company. The algorithms learn about what you like, which helps Ocado tailor offers relevant to you, helping you find what you need through a personalised experience. The artificial intelligence tools help power forecasts to predict demand, reduce waste and maximise the availability of fresh food. It’s clear to see that Ocado uses cutting-edge technology compared to most of the other food delivery service companies in the FTSE 100.

Declining earnings

Ocado reported a 12.1% fall in earnings before interest, tax, depreciation and amortisation (EBITDA) to £61m for 2021. A net loss of £223.2m for 2021, and a loss of £134.3m for 2020 does not look attractive to me, especially as supermarket spending during the lockdowns increased.

For 2022, Ocado’s finance chief Stephen Daintith told reporters that the company was planning £30m more investment in its International Solutions technology business than the market had anticipated. The upcoming earnings in 2022 may surprise many, therefore I’m not tempted to buy at the current price. Instead, I’d rather wait for Ocado to report stronger earnings, which could potentially see its share price soar again. Ocado is very volatile compared to most of the other FTSE 100 stocks, therefore I consider this a higher-risk stock for potentially a higher reward.

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Sabir Husain has no position in any shares mentioned. The Motley Fool UK has recommended Ocado Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Compass Group is now the world’s largest contract caterer, operating in around 45 countries worldwide. The locations Compass Group offers its services include schools, offices and factories. In addition to this, it also runs an impressive variety of bakery outlets, coffee shops and vending machines. The company was founded in 1941 and currently has a market cap of over £27bn.

Compass pointing in the right direction

Compass Group saw a major decrease in short interest during January. On 15 January the total short interest was 376,800 shares; however, as of 31 January, the total short interest was 90,900 shares. The short interest decline was 75.9% in less than two weeks, and Credit Suisse Group raised its target price on Compass Group from $26.37 to $28.40 on 7 February. The company also recently disclosed a dividend yield of 0.71%, which will be paid to shareholders on 10 March.

Compass Group operates with large diversification geographically, as it is in many countries around North America, Europe and Asia in particular. It is now increasing operations in high-growth countries such as India, Brazil and Indonesia, as it sees larger growth potential in these countries over the decade ahead.

In addition to geographic diversification, Compass Group also offers wide sector diversification. Sector revenue was well diversified for 2021: healthcare was 33%, education was 18%, defence was 10%, business & industry was 31% and leisure was 8%.  Within these sectors Compass Group has many large business-to-business partnerships, including companies such as Canteen, ESFM, Eurest and Bon Appetit.

Sustainable contributions

In addition to the progress of boosting profits, Compass Group is also progressing with its sustainability goals for 2022. A ban on air freight of fresh fruit and vegetable produces will see a focus more on increasing the use of local and seasonal products. With fruit and vegetable produce being its second biggest buying category, this means it will significantly reduce its carbon footprint.

Reasons for concern

Even though the compass seems to be pointing in the right direction, there are still some reasons for concern. Firstly, its price-to-earnings ratio is currently 85.82, which is up from 76.16 for 2021. Also, its price-to-cash-flow ratio is up to 25.45 from 22.59 in 2021. In addition to this, Deutsche Bank downgraded Compass Group from a “buy” rating to a “hold” rating in a research note on 20 January.

The stock price currently seems to be in neutral “hold” territory for many Wall Street analysts at the moment. I’m watching this stock closely as it offers diversification across many high-growth economies in a wide variety of industries.

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Sabir Husain has no position in any of the shares mentioned. The Motley Fool UK has recommended Compass Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.