Seeing the Rolls-Royce (LSE: RR) name on an engine cowling before a flight reassures me. But seeing the name on a share certificate has a less calming effect. The Rolls-Royce share price has fallen 19.7% in the past year. The shares are barely worth a third of their value five years ago. They have stopped paying dividends during that period too.
But the share price has been climbing lately. Since the new year started, it has broken through the £1 price level for the first time since last April. As a shareholder, that is pleasing to see.
But what really grips my attention is the question of whether the shares could fall back to selling for pennies like they did last year – or whether we could be seeing the start of a long and potentially lucrative leg up for the Rolls-Royce share price. Overall, I am leaning towards the latter view at the moment.
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More bullish than bearish
In the long term, I expect Rolls-Royce to benefit from a number of structural advantages. It sells a costly and complex product. Only a few engine manufacturers have the technical knowledge and expertise to compete, making barriers to market entry high. That could be good for profitability. Engines have a long lifespan but need extensive maintenance, meaning Rolls-Royce can benefit from its large installed base.
Those things have been true in recent years though, but the shares have still tumbled. That largely reflects concerns about reduced demand for civil aviation. But I am bullish about the outlook for 2023 and beyond because a resurgent travel market could push up civil aviation revenues and flying hours. That should be good for sales and profits at Rolls-Royce.
There are still risks. For example, higher demand could reveal whether Rolls-Royce’s extensive cost-cutting during the pandemic really boosts profitability, or instead harms its ability to ramp up production volumes as sales grow. The engineer also continues to wrestle with debt on its balance sheet, even after reducing it with the proceeds of asset sales.
If I am right, a buoyant global travel outlook could set the stage for take off. I think rising revenues and profits could help propel the Rolls-Royce share price higher in 2023.
I’m holding for recovery
Time will tell whether the bull or the bear case for the Rolls-Royce share price at this point is better grounded. But with a market capitalisation of around £8.5bn, I continue to see value in the global engineering giant with its storied reputation.
I plan to hang on to my shares for the foreseeable future, as a long-term investor. But as my portfolio is already exposed to Rolls-Royce, for now I do not plan to put any more money into the company, even though I am upbeat about its 2023 prospects.
