Rolls-Royce (LSE: RR) shares are currently trading around the 112p mark. In fact, the stock is up almost 30% in the past month. During the last year, the share price has increased by 25%.
Rolls-Royce shares fell below 90p in July but now have rebounded. I’ve been bullish on the engine maker for sometime. The FTSE 100 company released its interim results a few weeks back and its numbers are improving. I’d buy the stock today and here’s why.
In a nutshell, its operations are recovering. To me this is promising after 2020 was a turbulent time for the company. The key takeaway was that it managed to deliver a small profit in the six-month period compared to the colossal loss last year.
Rolls-Royce has been focusing on elements that it can control. And I think most investors would agree that this is the most sensible approach. It has been disposing of non-core assets, reducing its cost base and improving its liquidity position. Of course these measures are going to improve the bottom line. But there’s only so much fat it can trim and disposals it can make.
Free cash flow
While free cash flow is still negative, it has drastically improved. The encouraging thing is that it has still maintained its 2021 targets. The firm still expects to turn free cash flow positive during the second half of this year.
It also believes that it can achieve an improvement in full-year free cash outflow to approximately £2bn. The fact, that Rolls-Royce has stuck to these numbers means that things haven’t deteriorated. So far, it appears that the board has managed to stop the bleeding and stabilised the business.
Let me be frank, the recovery of Rolls-Royce shares is dependent on its key unit, Civil Aerospace. Performance is improving and there’s a recovery in business aviation and domestic large engine flying activity. The company has been reducing its cost base in this division as well.
What’s encouraging it that large engine LTSA flying hours were 43% of the 2019 level. This was up from 34% in the second half of 2020. While it has some way to go to return to pre-pandemic levels, at least it’s heading in the right direction.
The firm also said that it has already seen a return to 2019 volumes of flying activity for its business aviation engines and for large engines operated on domestic routes. For me, this is reassuring.
Of course, the coronavirus crisis is far from over. And it will take time for economies to recover. In fact, Rolls-Royce has said that international travel is gradually returning to normality. But this has been hindered by the global variation in vaccination rates and ongoing travel restrictions. This could continue to place pressure on the stock.
Should I buy?
I reckon Rolls-Royce shares could rise further in 2021. Especially if it manages to turn free cash flow positive later this year. Business is slowly but surely picking up and the company has a strong brand. Hence I’d buy the stock at 112p.
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Nadia Yaqub has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.