Rolls-Royce (LSE: RR) shares were devastated by the pandemic, falling drastically from their pre-Covid level. However, in the last quarter, momentum seemed to have picked up for the firm, with the shares climbing to 144p during October.
This momentum quickly ended, however, with the announcement of the Omicron variant. The shares have slumped over 12% in the past 30 days as a consequence. Does this present me with a buying opportunity? Let’s take a closer look.
Rolls-Royce share price outlook
Rolls makes the majority of its money from servicing jet engines. As such, the constant travel bans have plagued share price growth. While things seemed to be easing, the Omicron variant has led to a resurgence in coronavirus regulations. Many long-haul flight routes have virtually halted. The bad news was felt across the travel industry, with IAG and EasyJet both seeing double-digit share price drops after the news broke. In addition to this, many analysts don’t expect the aviation industry to fully recover until 2024. If this is the case, it could place a lid on the future growth of Rolls-Royce shares.
However, the Omicron variant has also boosted government responses to the coronavirus. For example, in the UK Covid-19 booster jabs are now being rolled out at a much faster rate to combat the variant. With more and more of the UK population vaccinated, it’s likely that travel numbers will ultimately increase. This could help keep Rolls-Royce shares afloat.
I think the 2022 summer season could prove pivotal for the travel industry. If the sector can enjoy high capacity, then consumer sentiment may be restored. This could lead to more abundant travel throughout the latter half of 2022, speeding up recovery for the sector. This would be great news for Rolls-Royce shares. However, it’s contingent on governments tackling the virus effectively.
Economic problems
One thing that worries me about Rolls-Royce is the firm’s capital structure. It currently has over £4bn of debt on its balance sheet, largely from pandemic-linked loans to keep the firm afloat. The reason this worries me is tied to the direction of the UK economy. Inflation has been steadily creeping up of late, with UK consumer price inflation (CPI) hitting 3.8% over the past 12 months. This is almost double the UK’s target of 2%. Due to these high increases, many investors are expecting an increase in interest rates. If this occurred, it would add to Rolls’ debts.
In just over a week, Rolls will release a trading update. I think this will prove pivotal for the direction of Rolls-Royce shares. In addition to this, it will show investors if the recent addition of Anita Frew as a non-executive director might be making an impact. Frew has chaired multinational chemicals company Croda International for the last five years, delivering huge success. If the report contains some good results, I’d hope that Frew’s impact on Rolls’ management could lead to some great longer-term growth for the firm.
Overall, although Rolls-Royce shares do look cheap to me, I’m not confident enough to buy just yet. I’ll be waiting eagerly to see the firm’s trading update before I consider adding the stock to my portfolio.
Dylan Hood has no postition 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.
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