Rolls-Royce share price has rebounded. Buy the RR rally?

  • June 8, 2022

Rolls-Royce (LON: RR) share price has staged a modest recovery in the past few weeks as the aviation industry rebounds. The stock has jumped to 94.10p, which is about 20% above the lowest level in May this year. Its market value has jumped to over 9.7 billion pounds.

Why has RR rebounded?

Rolls-Royce Holdings is a major British engineering company that provides products and services to governments and airlines. 

Its aviation business is the most important since it accounts for over 50% of its total income. In this division, the company manufactures engines that are mostly used by wide-body airlines and private jets. 

While engines are an important part of the business, its cash cow is the long-term contracts that the company has inked with airlines. These contracts give it exclusive rights to conduct services that are mandated by most laws. 

Therefore, Rolls-Royce has benefited substantially as the number of flying hours has rebounded in the past few months. 

Rolls-Royce is also expected to benefit because of increased defense spending in the UK, US, and other western countries. Its military products include submarines, fighter jet engines, military power engines, mobile tactical power units and microgrids among others.

However, like other industrial companies, Rolls-Royce is struggling with rising costs as the price of key components like titanium jump. These costs will be offset by the ongoing restructuring that has seen it exit some businesses and lay off over 9,000 workers. It also boosted its balance sheet by raising cash during the pandemic.

There are other potential catalysts for the Rolls-Royce share price. The firm is hunting for a new Chief Executive to lead the group. In addition, there are calls by some investors like Causeway Capital Management to break the firm into two by selling the power division.

Another catalyst is the lingering decision on whether to move back to single-isle engines that it exited a few years ago. Analysts believe that moving back to that business would be a good thing for the company because of how fast it is growing.

Rolls-Royce share price forecast

Turning to the daily chart, we see that the RR share price has made a steady recovery in the past few days. Along the way, the stock has managed to cross the important resistance level at 86.80, which was the lowest level in July 2021 and March this year. Notably, the Relative Strength Index (RSI) is pointing upwards while the coin has moved above the 25-day and 50-day moving averages. Therefore, the index will likely keep rising as bulls target the key resistance level at 100p.

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