The Rolls-Royce share price has lagged its industrial peers in the past decade. For example, the RR stock has barely moved in the past 12 months. In the same period, the Safran and General Electric stock prices have risen by 26% and 80%, respectively. The same trend has continued this year, with Rolls-Royce shares falling by more than 8% while GE has risen by more than 20%.
Rolls Royce has lagged
Roll-Royce is one of the biggest aircraft engine manufacturers in the world. The company specializes on large engines that are mostly used by long-haul aircrafts. Its biggest competitors are General Electric and Safran, a French company.
In 2020, 42% of the company’s revenue came from the civil aviation division. It was followed by the defence business that accounted for 28% of income. The power systems, ITP Aero, and Non-core businesses accounted for 22%, 6%, and 2% of total revenue. The firm has an order backlog of more than 53 billion pounds.
In the past few years, the firm has faced numerous challenges. The most important of them was the coronavirus pandemic since it led to significant challenges for its customers. In its civil aviation business, the firm makes most of its money from long servicing contracts. This challenge pushed the firm to raise capital through debt and selling shares in 2020.
The other large challenge is about its Trent 1000 engine. In 2017, the company’s customers started seeing cracks in this engine. In its response, the firm spent more than $2 billion to repair these engines. The challenge made some progress last week. Rolls-Royce Holdings also faced the challenge of Brexit, which increased its costs and made its business less efficient.
GE and Safran have also faced significant challenges. For example, GE has seen its stock decline from amost $60 in 2000 to $12. The firm’s outperformance only started recently when Lawrence Culp became the company’s CEO.
Now, with the aviation industry set to rebound from the pandemic, what is the long-term forecast for the Rolls-Royce share price? Fundamentally, RR Holdings is a good company with a giant backlog and trust by its key customers. It also competes strongly with the likes of GE. The stock is also extremely cheap as I wrote before.
Therefore, five years from now, there is a possibility that the stock will rebound. Also, with corporate consolidation increasing, we can’t rule out a situation where the company is acquired by a PE firm. Furthermore, it has a market cap of just $10 billion.
Rolls-Royce share price 5-year forecast
Turning to the weekly chart, we see that the RR share price has struggled substantially recently. It has even dropped by 74% from its highest level in July 2018 when the Trent crisis emerged. The stock is below the moving averages. Still, a closer look shows that the shares have formed an inverse head and shoulders pattern whose neckline is at 131p.
The stock is slightly below the 23.6% retracement level. Therefore, I suspect that the stock will be substantially higher than where it is today. During this path, the key levels to watch are the 50% retracement at 205p and the 78.6% retracement at 305p.
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RR shares chart
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