When I have covered the Rolls-Royce (LSE: RR) share price in the past, I have consistently concluded that this stock looks attractive as a recovery play.
The company is still one of the largest producers of engines for the civil aviation market in the world. It also owns a cache of valuable engineering know-how. This includes the resources to manage the Royal Navy’s nuclear submarines.
These are tremendous competitive advantages. It could take another corporation decades to design, develop and have a new engine approved for the civil aviation market. And when it comes to nuclear power, it seems unlikely the government will ever replace Rolls-Royce, considering the strategic importance of its position in the defence industry supply chain.
However, the company is currently facing severe headwinds. The coronavirus pandemic bought the business to its knees and, at the beginning of the pandemic, there were genuine concerns the enterprise would not survive.
Pulling through the crisis
Rolls has pulled through by slashing thousands of jobs, raising money from investors, and selling off a selection of non-core business. Unfortunately, it is not in the clear just yet. It could take several years before the global aviation industry returns to 2019 levels of activity.
As the bulk of the company’s revenues are tied to engine service contracts which are, in turn, linked to the number of hours flown. So until the aviation industry fully recovers, its sales are likely to remain under pressure.
Still, over the next decade, I think the business has potential. Should the aviation industry return to 2019 levels of activity by 2025, Rolls sales and income could jump. Its profit margins could even exceed 2019 levels, thanks to recent cost-saving initiatives.
The company is also pursuing plans to develop small nuclear reactors. If successful, this could become a multi-billion dollar business line for the group over the next few decades. However, it is unlikely the first facility will be up and running before the end of this decade.
Nevertheless, over the next five years, the company should provide more information on how this initiative will flow through to sales and profits. If the demand for the small reactors exceeds expectations, the Rolls-Royce share price could have a bright future.
Rolls-Royce share price potential
These are the reasons why I think the stock has potential over the next decade. The twin tailwinds of the aviation market recovery and launching new products could help the business grow its bottom-line and increase cash flow. If this scenario plays out, I think the Rolls-Royce share price will rise significantly from current levels over the next 10 years.
However, it is impossible for me to place a price target on the stock. There is a lot that could go wrong for the business between now and 2032. What’s more, nuclear technology is notoriously difficult to develop and commercialise. There is no guarantee these company initiatives will ever generate substantial profits.
Despite these risks, I would be happy to buy the stock for my portfolio as a speculative long-term growth play today.
Rupert Hargreaves 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.
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