The Rolls-Royce (LSE: RR) share price hit a 52-week low on 7 March at 83.49p. But then on 25 March, the shares spiked to a high of 111p. It was all down to speculation of a possible acquisition approach from BAE Systems.
With its critical importance to the UK’s defence industry, few companies would be allowed to bid for Rolls-Royce. But BAE is one of the few that could, possibly, do it.
As the days progressed though, it looked increasingly as if the speculation was just hot air. Analysts and institutional investors poured cold water on the idea, suggesting there is no sensible rationale for a takeover bid. And such a big step does not seem to fit into BAE’s strategy anyway.
Rolls-Royce share price
So the Rolls-Royce share price soon fell back. But at 98p as I write, it’s still higher than its pre-spike level. Does that suggest there really is some significant undervaluation here, and that the stock is set for an upwards re-valuation?
I think there’s a good chance we could see exactly that in the coming months and I think Rolls-Royce could come out ahead of the airlines in the post-covid recovery.
Picks and shovels
To me, it’s essentially a ‘picks and shovels’ stock. Those are so called because of the great American gold rush. Some prospectors struck gold, though many came out empty-handed. But for those who sold them, the picks and shovels made fat profits.
Airlines, as my colleague Roland Head previously pointed out, face competitive pressures. But if they all fly planes that use Rolls-Royce engines, then the Rolls-Royce share price could be at the leading edge of the aviation recovery.
Recovery caution
I have always said that I won’t invest in a recovery situation until I see the recovery actually happening. And I think I see that now. Maybe I’ll miss the very cheapest time to get in, but I should face significantly less risk.
As it turn out, if I buy Rolls-Royce shares now, I won’t actually have missed much share price recovery. After a few false starts, I think investors have become wary and they’re holding back. And that could mean it’s the perfect time for me to buy.
Rolls-Royce share price risk
I’m still conflicted, though I think the Rolls-Royce share price is too low now. It’s down to another of my general rules, to beware of companies carrying big debt. As part of its survival plan during the downturn, Rolls did take on a lot more debt.
And I might be too optimistic over recovery timing too.
Still, I reckon I probably will buy Rolls-Royce shares at some point in 2022. I just need to weigh up the attraction of the Rolls-Royce share price against the threats that come from the debt situation.
