Key points
- The milder Omicron variant should mean greater possibility of foreign travel
- The nuclear segment is forward-looking and will be integral to decarbonisation
- Defence contracts have supported the Rolls-Royce share price through the pandemic
The Rolls-Royce (LSE: RR) share price has been volatile throughout the entire pandemic era. The company, known primarily for manufacturing engines for aircraft, has been forced to make sizeable cutbacks to its workforce. Going forward, however, I think this stock could be an excellent investment. I outline three reasons why I think the Rolls-Royce share price will soar – let’s take a closer look.
Milder Omicron will bolster the Rolls-Royce share price
Part of the reason Rolls-Royce was hit so hard during Covid-19 is because it is paid per flying hour by airlines using its engines. As most planes were grounded during this time, cash flow was almost non-existent.
With Omicron, we finally have some brighter news. This variant is notably milder than Delta and this has led many countries around the world to open their borders again. More open borders mean more aircraft in the sky. In turn, this increases the number of Rolls-Royce engines in action and that finally translates into consistent revenue for the company.
This is reflected in a trading update from December 2021, when free cash flow (FCF) guidance was upgraded to exceed £2bn. Understandably, the new sale of civil engines was still low, with airlines still recovering from the pandemic. There is, of course, the risk of further variants arising. This would impact any recovery. In general, though, I think things are going in the right direction.
Going nuclear
I also suspect the Rolls-Royce share price will benefit from the company’s move into nuclear energy. It has detailed plans to build a number of small modular reactors (SMRs) throughout the UK.
This project has already secured £85m from the Qatar Sovereign Wealth Fund, in exchange for 10% of the venture. The UK government will also match any investment up to a limit of £210m. This suggests that countries are now viewing nuclear power as a means to decarbonise.
Rolls-Royce plans to have these SMRs on the grid by the 2030s, providing a clean energy solution far into the future. Each SMR will occupy just 10% of the space of a traditional nuclear reactor. It will also produce the energy equivalent to that derived from 150 wind turbines.
Defence – the heart of the Rolls-Royce share price
The defence segment has buffeted the company throughout the pandemic, because it involves long-term government contracts. Indeed, a December 2021 trading update stated that defence trading was broadly in line with expectations.
In September 2021, Rolls-Royce secured a £1.9bn contract with the US Air Force. This involves servicing B-52 engines, of which there are 650. In line with the stock’s long-term plans, this contract will last for the next 30 years.
These three factors strongly imply that Rolls-Royce operates shrewdly and possesses long-term planning skills. I am preparing for an imminent uptick in the Rolls-Royce share price as more people travel throughout spring and summer 2022. There is always the risk of further variants, however, denting this progress. The nuclear and defence segments show that the leadership is preparing for many years into the future. I will now be adding to my Rolls-Royce shares without delay.
Andrew Woods owns shares in Rolls-Royce. 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.
