Is the Rolls-Royce share price about to surge?

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.

The Rolls-Royce (LSE: RR) share price remains locked in a state of long-term decline. Trading problems and balance sheet woes set in during the middle of the last decade. Then the pandemic erupted in 2020 and pushed the engineer to the brink.

Rolls-Royce still has significant challenges to overcome. But there were some crumbs of comfort to take from the engineer’s recent half-year financials.

Should I buy Rolls-Royce in anticipation of a much-awaited share price rebound? Or do the problems facing the FTSE 100 firm outweigh the opportunities?

Supply strains

Rolls-Royce’s share price plunged last week when it missed its first-half profit forecast.

It reported an underlying loss of £111m thanks, in part, to extreme supply chain issues. Sourcing semiconductors is one of the issues facing it. And it’s one that could worsen considerable if China-Taiwan relations decline, for example, or if Covid-19 cases spike again.

Worryingly Rolls-Royce predicts that its supply issues — along with the problems caused by war in Ukraine and soaring inflation that hit first-half earnings — will persist into 2023.

Flying hours

On the plus side, the use of Rolls-Royce’s engines in civil aerospace continues to recover. Flying hours here recovered to around 60% of 2019 levels in the first half. Consequently servicing activity bounced back and underlying revenues at the firm’s core Civil Aerospace division rose 8% year on year.

The company expects flying hours to improve to 70% by the year’s end. And it said that they will reach 100% sometime in 2024 or 2025. But as an investor I need to consider the strong chance that this target could be missed.

Global aviation is suffering a severe labour crisis and flights are being cancelled in huge numbers. Meanwhile the cost of living is surging and consumer spending on travel is in danger of sinking. So is expenditure by business customers as the economy cools.

Powering up

Despite the disappointing first-half loss, Rolls-Royce was boosted by solid order growth between January and June. Turnaround hopes received a boost and trading was especially robust at Rolls’ Power Systems division.

Here orders clocked in at £2.1bn, up 53% year on year. This meant the division also enjoyed its best quarter on record for order intake.

Rolls-Royce said orders for its power generation equipment were particularly strong. This included demand for “mission critical back-up power” hardware for data centres. This is a potentially lucrative area for growth in the years ahead.

The verdict

The question is: was there enough in Rolls-Royce’s update to encourage me to invest? I’m afraid that the answer is no.

It’s not just that the profits outlook remains incredibly uncertain in the short-to-medium term. It’s that the business is having to contend with a hulking debt pile at the same time. This rose from the close of 2021 to remain above £5.1bn in June.

There are things I like about Rolls-Royce. I’m excited about its super-efficient UltraFan engine, which is due to begin testing later this year. Embracing green technologies could be a big profits driver in the years ahead.

Still, the risks of buying the FTSE 100 firm remain too great for me to invest for now. There’s a strong chance, in my opinion, that the Rolls-Royce share price might keep on sinking.

The post Is the Rolls-Royce share price about to surge? appeared first on The Motley Fool UK.

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Royston Wild 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.