The last 12 months have understandably been tough for many industries. With travel restrictions imposed by the global pandemic stopping most air travel, the entire aerospace sector has been one of the worst-hit. One of the more high profile cases in the downturn of aerospace is UK based Rolls-Royce (RR.L). As one of the two major aircraft engine manufacturers, Rolls-Royce has struggled over the last year. They generate a significant portion of their revenue by charging airlines for flying time of planes using their engines. This stream has expectedly dried up as the travel restrictions have limited air travel around the world. 

The fall in revenue has lead to RR.L share prices sustaining lows at less than half of pre-pandemic levels. However, it is unlikely its price will remain this low for too long. Positive signs are emerging. With vaccine distribution now underway in most developed countries, there are indications air travel could have a resurgence as restrictions are eased. This would see a return of one of their major revenue streams and should be accompanied by a spike in its value. Also, as a ‘strategically valuable’ company in the eyes of the UK government, they may qualify for state aid should circumstances become too dire. This means that even though RR.L may be seen as a risky investment, that risk could be limited.

While this could be a classic example of a ‘buy low, sell high’ stock, there are also a few major concerns to take into account. Over the last year, Rolls has had to let go of a significant portion of its workforce, many in its jet engine manufacturing department. So when demand does return, they may have trouble ramping up supply with a depleted workforce. Also, the emergence of vaccine-resistant COVID variants could slow the resurgence of air travel, extending Rolls’ suffering and raising questions about the possibility of bankruptcy. 

All in all, RR.L could be seen as an enticing prospect for investors potentially offering triple-digit returns over the next few years. However, the associated risks are significant and should be taken into account. These are unprecedented circumstances, so there is a great deal of uncertainty associated with predictions of Rolls-Royce’s future.

Broker Consensus (17/02/21)

Analysts who cover this security

BofA Global Research – Celine Fornaro
Deutsche Bank – Christophe Menard
Jefferies – Sandy Morris
Credit Suisse North America – Olivier Brochet
Morgan Stanley
Citi – Devang Doshi
BERNSTEIN – George Zhao
Investec Bank (UK) Plc – Rory Smith
Goldman Sachs Research – Chris Hallam
UBS Equities – Charles Armitage
Panmure Gordon – Sanjay Jha
Exane BNP Paribas
Societe Generale – Zafar Khan
JPMorgan
Berenberg – Andrew Gollan
ODDO BHF – Yan Derocles
Kepler Cheuvreux
Raymond James Europe RJEE/RJFI
Stifel Europe – Harry Breach
Morningstar, Inc. – Joachim Kotze
Day by Day – Valérie GASTALDY
Alphavalue – Marc Laubel
Vertical Research Partners – Robert Stallard
Redburn (Europe) Limited