- The pandemic decimated the Rolls-Royce share price
- The stock is up more than 20% in the last 12 months
- Rolls Royce became profitable again with positive cash flows in its latest earnings report
2020 was a catastrophic year for the Rolls-Royce (LSE:RR) share price. In 2021, the stock managed to recover some of what it lost in 2020. That notwithstanding, it has not yet reached its pre-pandemic levels. But what will happen to the share price of this aviation engine powerhouse in 2022?
It was not surprising that the aerospace sector had one of the severest impacts of the global pandemic. As nations were forced to close their borders to curtail the spread of Covid-19, the demand for services in this industry plummeted. Hence, revenue sources were cut for most companies, including Rolls-Royce.
As a result, shares of companies in the aviation sector nose-dived. In fact, Rolls-Royce lost over 80% of its value at a point in 2020. However, Rolls-Royce shares have begun to recover since the rolling out of vaccines and reopening of international borders for flights.
The path to recovery
The first Covid-19 vaccines were given in December 2020. Since then, millions of people have been vaccinated, leading to international travel to pick up again. That’s brilliant news for Rolls-Royce as the group’s income from servicing aeroplane engines has largely returned.
Consequently, the Rolls-Royce share price is up over 20% in the past year. This beats the FTSE 100, which was only up about 12% in the same period. Moreover, Rolls-Royce was once again profitable for the first half of 2021. The company announced £114 million profit before tax versus the loss of £3.2bn a year ago.
In my opinion, this is encouraging. And with the gradual reopening of the economy, more recovery is likely on the horizon for this business. At least, that’s what I think.
What will happen to the Rolls-Royce share price in 2022?
Since the start of the new year, the Rolls-Royce share price is up around 2%. The company seems to be having a fair start to the year. If it continues at this pace, it will not be surprising for the stock to beat its 2021 run and possibly even reach its pre-pandemic share price.
Last year, the company made important decisions such as cutting costs and selling some non-core assets. Needless to say, these restructuring strategies are already having a positive effect on the Rolls-Royce share price. And it’s, in turn, allowed the group to have positive cash flow, which is a green light for me.
With the global economic recovery gaining ground, I think more demand for Rolls-Royce engines and resumption for international flights globally could further boost the company’s stock throughout 2022.
The risks to consider
As encouraging as the group’s latest progress has been, several key threats remain to this business. The pandemic is still ongoing. And the re-introduction of travel restrictions could undermine the recovery of Rolls-Royce and its share price.
Meanwhile, the evaporation of nearly half its total revenue sources in 2020 forced management to load up on debt to keep the lights on. Today, the group has around £7.9bn of obligations on its balance sheet. This increased leverage undoubtedly adds additional pressure on profit margins which are currently extremely tight, in my opinion. As such, the group could struggle to fund future growth until its balance sheet returns to a healthier state.
Final thoughts on the Rolls-Royce share price
2022 could be the year for the Rolls-Royce share price to recover its pre-pandemic levels. But it’s far from guaranteed, with plenty of challenges to overcome. Personally, I’m more interested in two potentially explosive AI tech stocks my colleague Saima has discovered for my portfolio.
Learn more about Rolls-Royce
- Is the Rolls-Royce share price too cheap to miss?
- Where is the Rolls Royce share price going?
- What’s next for the Rolls Royce share price?
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Prosper Ambaka does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies, assets, and strategies mentioned in this article are those of the writer and, therefore, may differ from the opinions of analysts in The Money Cog Premium services.
