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His name Rolls Royce (LSE:RR) is well-known to air travelers around the world thanks to its well-respected reputation as an aeronautical engineer. But one thing that won’t be rising anytime soon is the price of Rolls-Royce shares.
Last year it decreased by 30%. They are now traded in coins. So, should I buy them for my portfolio in the hope that they will go up pound to pound in the coming years?
The pandemic and associated travel restrictions have hit the airline industry hard. The obvious losers include the airlines Light jet and the parent of British Airways IAGThe past several years have also been very challenging for automakers like Rolls-Royce.
It makes money by selling engines to aircraft leasing companies and airlines, many of which are closely controlling their costs. That means some are less likely to order new engines a few years ago. The engineer earns money by servicing the installed base. It consists of thousands of engines. Servicing them is a valuable source of income and profit that can last for decades after the first motor sale.
A sharp drop in earnings meant that Rolls-Royce was plunged into bankruptcy in the wake of the pandemic and had to cash in on existing shareholders to raise cash. I see a potential recurrence in the future if there is another sudden and sustained decline in passenger demand for air travel.
But the past is one thing. What about the future?
I think Rolls-Royce shares can benefit from the growing demand for civil aviation. In many markets that have recovered from or exceeded pre-pandemic levels, it may remain overbought in at least some markets, albeit for a short period of time. An increase in the price of oil can affect demand, which is a risk to serve the company’s income.
I see opportunities for continued growth in Rolls-Royce’s defense business as many European countries plan to increase their military spending.
Last month, he said he expected civilian aerospace engine flight hours to reach the pre-pandemic peak in 2024 only – but he expects them to get there. This year, the defense division expects moderate revenue growth.
I think the long-term prospects are promising. But there are risks. As a multinational company that reports in sterling, I see a risk to the company’s financial performance due to a weak pound.
Why do I own Rolls Royce shares?
I’m a believer in long-term investing and see a lot to like about Rolls-Royce from that perspective.
He saw demand recover. Only a few companies have the knowledge and expertise necessary to build and service large aircraft engines, which gives the company and its competitors pricing power. It may bode well for future profitability.
I think the current share price of Rolls-Royce shares does not reflect the strength of the company. If it can consistently return to profitability over the coming years, I think the shares could trade in the pound again. But I’m happy to hold onto my shares and have no plans to sell even if the price doesn’t rise any time soon.