The Rolls-Royce share price slumps on virus fears. Should I buy the stock?


The outlook for the Rolls-Royce (LSE: RR) share price has changed dramatically over the past week. The emergence of the new coronavirus variant, coupled with travel bans governments imposed to try and control its spread, have brought the aviation sector’s recovery to a sudden halt. 

Before the travel bans, it appeared as if Rolls’ outlook was improving. Airlines were placing orders for new planes, and consumers were returning to the skies. The latest set of travel restrictions is a massive setback for the group. It is unclear if, or when, this latest headwind will disappear. 

As such, I have been wondering if I should change my bullish opinion on the stock. Before this week’s events, I was a buyer of Rolls-Royce shares. Now the outlook has changed, I am re-evaluating my position. 

Rolls-Royce share price outlook

The impact the latest travel bans have had on the aviation industry is evident. Shares in carriers like IAG plunged a double-digit percentage immediately after the restrictions were announced. Traffic on some long-haul routes, which was recovering, has now virtually stopped. 

Granted, many global destinations remain unaffected. Internal markets such as the US are also unaffected by the bans. However, the aviation industry operates on minuscule profit margins, and if it is not running at 100% capacity, losses quickly emerge. 

I think the latest pandemic restrictions will set Rolls’ recovery back. As of yet, it is difficult to say to what degree they will impact the group. It depends on how long the restrictions last.

If they last into the second quarter of next year, Rolls may have to revisit its earnings projections for 2022. If restrictions are rolled back in the next month or two, the impact on the group may be more manageable. 

The key summer season

In reality, it does not matter what happens over the next couple of weeks. The future of the Rolls-Royce share price will depend on what happens next summer.

If the aviation industry is able to enjoy a relatively normal 2022 summer season, profits could recover across the sector. This would improve confidence and may lead to more aircraft orders. Improved consumer confidence may also translate into more bookings, generating more revenue for airlines and justifying more aircraft orders. 

All in all, while the latest travel restrictions are frustrating for the airline industry, they are not the end of the world. It was always going to take years for the industry to recover from the pandemic. A couple of months here or there will not make much difference (assuming the restrictions only last for a couple of months).

As such, I think the Rolls-Royce share price still looks attractive as a contrarian value investment. I would buy the stock for my portfolio as the airline industry continues to recover from the lows of the pandemic.  

The post The Rolls-Royce share price slumps on virus fears. Should I buy the stock? appeared first on The Motley Fool UK.

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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.