Rolls-Royce (LSE: RR) manufactures engines for commercial and military aircraft, and designs and constructs power systems. The outbreak of the pandemic in March 2020 had a catastrophic impact on the Rolls-Royce share price. While there have been intermittent rebounds, the shares have fallen to new lows, recording a price of 64.8p in November 2020. Rolls-Royce stock faced an existential threat when most aircraft were grounded, because the company is paid based on flying hour contracts by airlines using Rolls-Royce engines.
In response, management acted with a great deal of urgency. One priority was to cut 7,000 roles from the workforce to mitigate the inevitable and significant 2020 loss. The company also began selling subsidiaries, including Bergen Engines, ITP Aero and Air Tanker Holdings. In addition, the civil nuclear business segment was sold and these sales all contributed towards a £2bn target in 2021. Nonetheless, Rolls-Royce recorded a £1.6bn loss for 2020 that was largely due to reduced flying hours globally and this was a difficult figure for shareholders to swallow. Indeed, this loss and the sale of a number of subsidiaries could easily have given me good reason to sell or short Rolls-Royce stock. During 2020, however, I felt that buying Rolls-Royce stock was appropriate for accumulating at low levels for the long term.
For much of the first half of 2021, the Rolls-Royce share price lingered around the 100p mark and occasionally broke 10% either side of this level. In October 2021, however, the price flew to 150p on a general feeling that the pandemic was coming under greater control and international travel was returning to pre-pandemic norms. These gains were negated by the emergence of the Omicron variant and the share price retraced nearly 100% of these recent gains. This downward move was on lower volume and this tells me that the general downtrend is running out of steam. I interpret all these recent price movements as being bullish in nature and this is the first reason why I will be continuing to stock up on Rolls-Royce shares.
Recent news about the company supports my view. In September 2021, the United States Air Force awarded a contract to Rolls-Royce to provide the B-52 engine replacement programme, an important decision which will last for the next thirty years. Furthermore, the power systems segment of the business has been bolstered by the decision to move into nuclear power. In particular, the construction of several small modular reactors to produce energy on a very low carbon basis will enable a smooth transition over the long term from fossil to renewable fuels. This was supported recently by Qatari investment into the low carbon nuclear power business in December 2021.
The Rolls-Royce share price has been volatile in recent times, but I have good reasons to be optimistic. I will most certainly be buying up more Rolls-Royce stock!
