Rolls-Royce share price has pulled back in the past few weeks after soaring to a record high of 592p earlier this month. The stock has moved to 546p on Friday, down by 7.8% from its highest level this year. Its market cap has moved to about $58.4 billion.
Rolls Royce has made progress
The Rolls-Royce stock price has done well in the past few years, helped by the strong demand for its civil aviation and defense division.
Many airlines like United, IAG, and Emirates have launched a substantial fleet modernization process. As a result, companies like Airbus and Boeing have announced huge backlogs of almost 15,000 planes.
Rolls-Royce Holdings has also benefited from the ongoing wars in the Middle East and Eastern Europe. As a result, countries have been increasing their defense spending, a trend that will likely continue now that Donald Trump has won the election.
At the same time, Rolls-Royce’s management has worked to save costs by shutting its unprofitable divisions and even laying off some of its workers. The most recent announcement was its decision to sell its Naval Propulsors & Handling business to Fairbanks Morse Defense.
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Rolls-Royce also sold its Direct Air Capture assets and the lower-power-range engines if its power dvision to Deutz AG. The other notable decision was to close its Rolls-Royce Electrical’s Advanced Air Mobility business.
These actions have left a company that is fairly leaner than what it had a few years ago. They have given it cash that it needs to improve its innovation through research and development (R&D).
The most recent trading statement showed that the company’s business continued to do well, with its underlying operating profit expected to be between £2.1 billion and £2.3 billion. Its free cash flow is expected to be between £2.1 billion and £2.2 billion.
The civil aviation division reported strong results, helped by the demand of wide body planes and a 18% increase in flying hours. The same is true with its civil aviation business whose demand has risen because of higher spending. However, this division is still going through severe supply chain challenges.
Read more: Could the Rolls-Royce share price suffer a harsh reversal soon?
In a statement on Monday, the management noted that the company will see more sales of its troubled Trent 1000 engine that powers Boeing 787 Dreamliner. The company expects that two of its fixes will help to boost demand. In an interview, the CEO said:
“By the end of next year, we will have a very competitive product and then we are going to push that product because it’s a very good product. But durability has been the issue.”
A key concern about the Rolls-Royce share price is that its stock has become relatively overvalued. The stock trades at a forward P/E ratio of 36, higher than the sector median of 24. It has a price-to-free cash flow multiple of 14, which is fairly overvalued.
Rolls-Royce share price analysis
The daily chart shows that the RR share price peaked at 592.4p on November 6. It has formed an ascending channel shown in yellow.
The stock has moved above the 50-day and 100-day Exponential Moving Averages (EMA), meaning that bulls are in control for now.
The recent rebound happened after it formed a doji candlestick pattern. In most periods, doji is a popular bullish candlestick pattern. The Relative Strength Index (RSI) has risen and is nearing the key point at 50.
Therefore, the stock has two potential scenarios in the coming days. First, a drop below the support at 517.4p, its lowest point last week, will point to more sell-off as sellers target the key support at 480p. Second, the alternative scenario is where it rises and retests the upper side of the channel at 592.4p.
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