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The Rolls-Royce (LON:RR) share price has moved sideways in the past few weeks as the recent momentum faded. The shares were trading at 203p on Wednesday, a few points below the year-to-date high of 211p. They have soared by more than 130% from the lowest level this year.
Momentum fading
Rolls-Royce Holdings has been one of the best-performing companies in the FTSE 100 index this year. This recovery happened as investors cheered the company’s turnaround and the rebound of civil aviation.
The last phase of the recovery happened after the company published strong financial results earlier this month. These results showed that the company’s underlying profit jumped to over £673 million in the first half of the year.
Rolls-Royce Holdings generated an underlying profit of £125 million in the same period last year and £652 million in 2022. Its free cash flow jumped to £356 million from the previous year’s outflow of over £68 million while EBIT margin was 9.7%.
Civil aviation was the biggest contributor to Rolls-Royce business as the industry boomed. Revenue surged to £3.25 billion while defence rose to £1.91 billion. In the same period, the power systems revenue from £1.37 billion to £1.77 billion.
Rolls-Royce Holdings hopes that its operating profit for the year was between £1.2 billion and £1.4 billion. Its free cash flow came in at between £0.9 billion to £1.0 billion. It expects that the civil large flying hours will be between 80% and 90%.
Rolls-Royce Holdings is well-positioned in key sectors that are seeing robust growth. For example, we have seen large orders by most airlines, including United and Delta making huge orders. While most orders have been of narrow-body aircrafts, wide-body orders have also risen.
Rolls-Royce has also benefited from the ongoing war in Ukraine and tensions between US and Russia. For example, it is the sole provider of UK nuclear submarines. In a note, the company’s CEO said:
“The robust forecast of defense budgets in most Western geographies, underpin the long-term outlook for the business. Revenue growth was strong, up 15%. This reflects increased underlying demand and a first half weighted delivery profile.”
Rolls-Royce share price forecast
Earlier this year, I predicted that the RR stock price would surge to over 200p. This view was accurate as the stock’s rally continued. On the daily chart, we see that the shares made a bullish breakout above the key resistance point at 159p, the upper side between March 9 and July 24.
The stock remains above the 50-day and 100-day exponential moving averages (EMA), signaling that buyers are in control. Recently, the stock has moved in a tight range as investors worry about its upside.
Therefore, I believe that the shares have room for more gains in the coming months. If this happens, the next level to watch will be at 225p. Stull, there is also the risk of the shares will retest the support at 180p.
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