The Rolls-Royce share price (LON: RR) has experienced a torrid time over recent years. Its current level of 117p is nearly 70% down on the five-year high it recorded in August 2018. Since then, the company has experienced a hugely challenging period owing to the pandemic and the travel restrictions is has prompted.
The firm’s latest trading update was released last week. It showed the company is making encouraging progress in a number of key areas. Notably, its disposals programme has led to £2bn of assets being sold to create a leaner and nimbler business. It also won a new defence contract and has seen the benefit of cost reductions on financial performance.
Indeed, over the long run Rolls-Royce could enjoy significantly improved financial prospects. As the world economy gradually returns to normality following the pandemic, and travel restrictions are lifted, it is likely that demand for air travel will return. This could catalyse large engine flying hours, thereby increasing demand for new engines and servicing.
Of course, there may be some way to go between now and then. The degree to which the Omicron variant will cause further travel disruption remains unclear at the time of writing. However, it serves as a reminder that new variants are likely to prompt a degree of caution among policymakers that may act as a drag on the prospects for the airline sector and, in turn, on the outlook for Rolls-Royce.
This situation may be reflected in the performance of the firm’s share price. Its volatility has been relatively high over recent months, although it does trade around 10% higher than six months ago. Looking ahead, further volatility seems relatively likely over a sustained period. But this could be coupled with a gradual improvement in operating conditions that, alongside cost reductions, improves the prospects for Rolls-Royces’ stock price.
Undoubtedly, forecasts are of limited use given the highly fluid situation involving Covid-19. However, Rolls-Royce’s forward price-earnings ratio using next year’s forecast earnings per share figure of 6p stands at 19. With growth in earnings of a third expected in financial year 2023, the long-term potential for the company’s shares to deliver capital gains from their current level seem upbeat. However, a return to their five-year high appears to be a rather distant prospect given the high levels of risk and uncertainty in the aerospace sector.