Rolls-Royce (LON: LON:RR.) share price has remained in a tight range this year as investors reflect on its strong performance in the past three years. After the stock plunged to 33.85p in September 2020, it jumped to a high of 312p in December last year. It is now hovering near its highest point since May 2019.
Does it have more upside
Rolls-Royce stock price has jumped sharply in the past three years because of a convergence of four key factors. First, and most importantly, the civil aviation industry has recovered well from the Covid-19 pandemic. In a recent statement, IATA estimated that airline revenues will jump to $964 billion this year while net profits will rise to $25 billion.
Rolls-Royce is a major player in the civil aviation industry where it provides engines and maintenance. In most cases, the company sells engines to airlines, often at a low margin or even at a loss. It then makes money through the life of the engine through regular maintenance.
Therefore, the company’s profitability and revenue are mostly tied to the usage of the engine. This explains why it looks at the number of flight engine hours as a measure of growth. Analysts believe that barring any major issues with its engines, the company will continue doing well in the near term.
Rolls-Royce has also done well because of the rising geopolitical challenges globally. It is a major military contractor, with its biggest markets being in the United States, Saudi Arabia, and European countries.
Further, the firm has a fairly new management that is focused on building a growing and a profitable company. In December, the company said that it expects its operating profit will rise from £0.65 billion in 2022 to between £1.8 billion and £2.8 billion in the mid-term.
The management also expects that its operating margin will expand from 5.1% in 2022 to between 13% and 15%. Its free cash flow is expected to rise from £0.5 billion to between £2.8 billion and £3.1 billion.
As part of this strategy, Rolls-Royce wants to invest in its core areas like business aviation, microreactors, marine, government, and widebody. Instead of investing in a new narrowbody business, the company aims to create partnerships. Notably, the management wants to exit its non-core business by disposing of assets worth about £1.5 billion.
Therefore, Rolls Royce stock price performance will depend on whether the company will hit its short-term targets. I believe that it will achieve that now that inflation is falling and business conditions are improving.
What next for the Rolls-Royce share price?
RR chart by TradingView
The weekly chart shows that the RR stock price has been in a remarkable comeback. Recently, however, the stock has remained in a consolidation phase as investors reflect on this rally. It has remained above the 50-week and 200-week Exponential Moving Averages (EMA).
Therefore, as I predicted in December, I suspect that the shares have more upside, with the key level to watch being at 378.90p, the highest swing in June 2018. This price is about 27% above the current level.
This article first appeared on Invezz.com
