Watch out! Here’s why the Rolls-Royce share price could fall again

On Thursday (24 February), investors can expect a trading statement from Rolls-Royce (LSE: RR). Will the update boost the Rolls-Royce share price, or could it put it under further pressure?

An update to lift the Rolls-Royce share price?

I suspect it could be the latter – so the share price could fall. While more travel in recent months will likely mean an improved full-year performance, it’s still unlikely to change the minds of the bears. That’s because there are still quite a few issues for management to sort through – some of which even pre-date the pandemic.

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Banking giant UBS forecasts second-half group sales of £6.3bn at Rolls, which would only be an 8% rise on last year. Hardly a sign of a massive turnaround. It has said it retains “a cautious view on the recovery of long-haul and corporate travel that Rolls-Royce is overexposed to”.

Moving forward?

The latest trading statement would follow December’s update, which showed that free cash outflow in 2021 was expected to be better than its earlier guidance for £2bn. Rolls-Royce said then it expected to have cut 8,500 jobs by the end of 2021. Cash flow and cost savings, therefore, are two themes that will be vitally important in this week’s update, along with a recovery in aerospace. Any of these being below expectations, I think, could see the Rolls-Royce share price fall.

Overall, 2021 was a horrible year for the company, with huge profit warnings – unsurprisingly. There’s a chance for it to build back better this year. This week’s trading statement will be a good indication of how far the engineer has come and where it’s headed.

Exciting new growth opportunities

Taking a longer view, there may be opportunities for Rolls-Royce to grow. The development of modular nuclear reactors holds some promise if progress is made in commissioning them. That’s a particularly exciting new potential growth area for Roll-Royce.

As a leading engineer, with heritage, world class expertise and a strong brand, it may be well positioned to generate sales in other emerging technologies where it could apply its expertise. Given low expectations for the group, new revenue streams could really lift investor expectations and, in turn, the share price. Any announcement along these lines, accompanied by a return to normal for the core business, could see the Rolls-Royce share price do very nicely.

Avoiding the shares

In the short-term then I think there’s a risk this week’s trading statement could see the share price fall. That seems likely if cash flows are lower than expected or Rolls isn’t cutting costs significantly. Also, if the tone on aerospace isn’t positive I think that could be a warning as well. The tone of the UBS note on the firm also makes me cautious on the shares. Then again, if the update is positive then I could be wrong, and the share price could get a short-term boost. But overall as a long-term investor, I’m not convinced Rolls-Royce shares will outperform the market and so I’ll be avoiding the stock.

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Andy Ross owns no share 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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