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Rolls-Royce share price is up by near 10% today, becoming the best-performing stock in the FTSE 100. The stock has climbed by more than 30% since bottoming at 102p on October 2. So, what is moving the embattled aircraft engine maker?
The coronavirus pandemic has decimated several industries. It has brought the cruise line industry down, leaving companies like Norwegian and Carnival a shell of their former selves. Hotels and other tourism-related companies are still in trouble.
The airline industry has continued to lose millions of dollars every day because no one is travelling. Indeed, in the United States, airlines are only surviving because of the help from the Federal government. The same is true in Europe, Asia, and other countries.
Rolls-Royce, one of the biggest engine makers has been hit particularly hard. This is because the company makes money mostly from the civil aviation segment. It does this by selling engines and receiving long contracts to service them.
The servicing contracts are usually lucrative because of their durations. Now, with many aircrafts being parked, the company is not making money because they are not accumulating miles.
Worse, Rolls-Royce sells most of its engines to wide-body aircrafts that mostly travel across continents. These routes will be the last to reopen because of the fear of travel. Also, business travel will take years to recover.
The company understands the challenges it faces. As a result, it was among the first blue-chip companies to slash its dividend. It was also among the first companies to announce cost-cutting measures such as job cuts. Most importantly, the company has moved to shore-up its balance sheet.
While it has money to run for several months, the company is raising £2 billion to improve its balance sheet. However, its capital raising has not been received well. Just last week, Goldman Sachs and Morgan Stanley decided to cut their exposure to the funds.
As a result of Covid and reliability problems, Rolls-Royce share price is among the worst-performing in the FTSE 100. The stock has dropped by more than 84% in the past five years and by more than 80% this year alone.
So, is Rolls Royce stock a good buy? To long-term investors, a case of investing in the company could be made. Furthermore, traveling will bounce back in the future and the firm has a substantial share in engine manufacturing. However, for investors with a short-term view, investing in Rolls-Royce seems like a bad idea because of the likely volatility.
The daily chart shows that Rolls-Royce share price made a hammer pattern on Friday. This candlestick pattern is usually a sign that a bullish reversal is about to happen. Interestingly, the pattern happened when the shares reached a psychologically-important support of 100p.
The price remains significantly below the 50-day and 100-day EMA. Therefore, in the near term, the shares could continue to rise as bulls aim for the next resistance level at 200p. However, a move below last week’s low of 102p will invalidate this trend.
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