Rolls-Royce (LON: RR) share price has performed as I predicted in this report. The stock has made a steady recovery to the highest point in almost a year. It has risen by 66% from its lowest level in 2022, meaning that it has outperformed the FTSE 100 index. The shares have also done better than other FTSE industrial names like BAE Systems and Melrose Industries. Here are some reasons why the stock will recover.
Rolls-Royce stock price will likely continue recovering because of the expected recovery of the aviation industry. There are reasons to believe that this sector will recover in 2023. First, there are signs that inflation is easing in top aviation countries like the United States and in Europe. In the US, inflation has dropped in the past 6 straight months.
Low inflation leads to a rebound in traveling as consumer take advantage of these prices. This is notable because Rolls-Royce generates most of its revenue from the civil aviation industry. It makes money by entering long-term service contracts for engines that it sells. As such, the more airlines fly, the more money it makes. Fueling this situation is the fact that Mainland China and Hong Kong have all reopened.
Another potential catalyst for the RR stock price is the ultrafan engine, the biggest one in the industry. The company will conduct advanced testing of this engine in the first quarter. While this engine has no orders yet, it has a lot of promise. For one, it uses Sustainable Aviation Fuel (SAF), which produces less emissions than traditional fuels. Also, the engine consumes about 20% less of that fuel.
Therefore, I believe that the company will have more orders once testing is complete. Also, the company could use the engine as a prototype for building engines for narrow-body aircraft. If this happens, the company would re-enter an industry that is growing at a faster pace than wide-body aircraft.
Further, the Rolls-Royce stock price will likely continue rising because of the new CEO. Tufan Erginbilgic has a long track record of cutting costs and streamlining businesses at BP. Therefore, I believe that he will work to boost the company’s efficiency.
Rolls-Royce is already a more efficient company than it was before the pandemic. Warren East, his predecessor, slashed headcount by 9,000, sold ITP Aero, and reduced debt by over 2 billion pounds. Therefore, he could accelerate the transformation.
The other reason to buy Rolls-Royce shares is that technicals are supportive. They are about to form a golden cross, where the 200-day and 50-day moving averages crossover. Also, they formed an inverted head and shoulders pattern and moved above the 50% Fibonacci Retracement level. This means that the stock has the momentum to keep rising to about 150p.
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