The Rolls-Royce (LON: RR) share price has started 2023 with an aggressive bullish trend, surging by 15 percent in the first 16 days of the year. The bullish trend has also been a continuation of the past few months that included its value rising by 2 percent last month and 16 percent in November. However, even as
Should You Invest in Rolls-Royce?
Rolls-Royce Holdings, the British industrial conglomerate, has had a tumultuous ride in the stock market over the past year. In 2022, the company’s share price severely underperformed, crashing by almost 30% between January and December. This was in contrast to the blue-chip FTSE 100 index, which dropped by less than 5%, and the Vanguard Industrial ETF (XLI), which dropped by about 10%. The industrial giant saw its market cap evaporate to about 9 billion pounds. However, the start of 2023 has been positive for Rolls-Royce, with the stock soaring by more than 57% from its lowest level in 2022 and leading the FTSE 100 higher. This raises the question, should investors consider buying Rolls-Royce shares for their portfolios?
Rolls-Royce operates in the civil aviation and defense industries, which account for about three-quarters of its group revenues. The company manufactures some of the best-known wide-body aircraft engines that are used by leading airlines and is a key player in the military contractor industry. Additionally, the company is a leading player in the power sector. The outlook for the civil aviation industry is positive, with commercial passenger numbers from emerging markets expected to soar over the next decade, leading to an increase in the number of planes in the air. This bodes well for Rolls-Royce, as it should lead to increased demand for its engines.
A 2023 Comeback?
The defense industry is also expected to do well in 2023, with countries boosting their defense spending, particularly in light of recent geopolitical tensions. Rolls-Royce has decades of experience building plane engines and servicing them, making it a go-to hardware supplier for plane manufacturers and militaries. Additionally, the company operates in a highly capital-intensive industry, which creates barriers of entry for new competitors.
However, there are some concerns that should be taken into consideration. The company has significant financial obligations, with undrawn net debt at £4 billion as of September. The cost of servicing this debt is high and is set to rise as interest rates increase. This could impact the company’s ability to invest in R&D in areas such as green technology. Additionally, the near-term outlook for the aviation industry is uncertain, and a downturn in the global economy could hit the revenues that Rolls-Royce makes from its servicing activities and affect its ability to pay down its debts.
Therefore, I expect the current bullish trend to continue despite the concerns registered above. There is a high likelihood that we might see the company’s share price trading above the 130p price level within the next few months.
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