The Rolls-Royce (LSE: RR) share price has been tumbling recently, and over the past month it’s down 15%. This is partially due to the emergence of the Omicron variant, which has put the short-term future of international travel in doubt. Over the past year, the shares are equally down around 5%. As such, currently priced at 124p, is the Rolls-Royce share price heading towards under 100p, or can it make a strong recovery instead?
Trading update
Today, the company delivered a fairly upbeat trading update. This stated that its trading performance was improving, mainly due to the gradual recovery of international flying and resilience in the defence sector. This meant that in the third quarter, there was the return of positive free cash flow. As a result, free cash outflow for the whole of 2021 is expected to be lower than the £2bn that was previously guided.
The restructuring programme is also progressing well and is delivering key cost savings. This means that by the end of 2021, the group is hoping to have removed more than 8,500 roles, which should help with profitability. As such, the target of £1.3bn in savings by the end of 2022 seems very attainable. In fact, it has already delivered savings of more than £1bn for full-year 2021. Therefore, I hope that when the group reports its full-year trading update in February, the picture will be positive.
Nonetheless, despite this upbeat trading update, the Rolls-Royce share price still fell around 4% in the early hours of trading. This was mainly due to the overall gloomy outlook in the travel industry, especially as new restrictions are placed to combat the Omicron variant. With large engine flying hours currently just at 50% of 2019 levels, it’s also clear Rolls-Royce hasn’t made a full recovery. Therefore, short-term headwinds certainly remain. These are factors that could see the Rolls-Royce share price fall into penny stock territory once again.
Other factors
But while the short term looks uncertain, I’m more optimistic on the group’s long-term future. Indeed, it has managed to strengthen its balance sheet through several disposals. This included the sale of ITP Aero for around €1.7bn back in September, and Bergen Engines for approximately €100m. All in all, these disposals, which total around £2bn, will be used to help reduce net debt. This should also ensure that it comes out of the pandemic in a strong position.
Will the Rolls-Royce share price fall below 100p?
Of course, it’s extremely difficult to predict the short-term direction of the Rolls-Royce share price. But the emergence of the Omicron variant does place the aviation industry in significant doubt once again and Rolls-Royce will be heavily affected by this. Therefore, I wouldn’t be surprised if it crashed below 100p over the next few months.
Despite this, as a long-term investor, I’m still tempted by the Rolls-Royce share price. The firm has navigated the pandemic well and I feel it will come out in a strong position. Therefore, despite the risks facing the company, I’m tempted to buy, especially if it falls into penny stock territory.
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Stuart Blair 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.
