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August 1st, Rolls-Royce (LSE: RR) shares are likely to move one way or the other after the company publishes its first half results. I would be very surprised if it flies high FTSE 100 the stock didn't budge an inch.
Rolls is targeting full-year operating profit growth in the 6%-25% range. If management says the company is progressing towards the end of that guidance, then a 500p+ share price could be on the cards.
And if it's more towards the lower end? Well, we can look at the lowest share price come Thursday night (August 1).
Supply chain issues
The City currently expects Rolls-Royce to post a turnover of £7.7bn in the first six months of the year. We don't know how much profit will be made from that, but CEO Tufan Erginbilgiç said in May that he expects “comprehensive measurement of both profitability and cash flow throughout the year“.
He also mentioned supply chain issues recently. According to the Financial Timeshe said the aerospace industry is suffering from “one of the worst supply chain locations ever“.
This leads to increased costs and production delays within the sector. Worryingly, Erginbilgiç said that these problems could last another 18-24 months.
Are you warning investors about future financial performance challenges? It's a possibility.
On the other hand, these problems are reinforced by the rapid recovery of the aviation sector following the pandemic. This has led to an increase in aircraft orders, which is obviously good for Rolls-Royce.
In 2024, it won new contracts with Indian airline IndiGo, which ordered 60 Trent XWB-84 engines, and Vietjet Air. These are both the fastest growing airlines in Asia.
A worrying geopolitical development
But there are other potential dangers on the horizon. As I write, Israel has vowed to retaliate for a recent rocket attack on the Israeli-controlled Golan Heights, which it has blamed on Hezbollah.
This has also raised fears about the problem escalating into a regional conflict. Let's hope not.
But if the worst happened, it wouldn't benefit global supply chains or international travel. And it also indicates that certain risks are beyond the company's control.
Can I buy a dip?
I've been wanting to add to my Rolls-Royce holdings for a while. But with the stock trading at a forward price-to-earnings (P/E) ratio of 28, I was reluctant to do so.
By current industry standards, that's not terribly expensive. But it's also not cheap and it shows the strong growth of the company's divisions.
In Civil Aerospace, main engine flight hours returned to 100% of 2019 levels in the four months to 30 April. This was driven by the stabilization of the global automobile industry and its growing fleet.
In defence, Australian funding was confirmed for the AUKUS submarine programme, which included Rolls-Royce reactors.
For Power Systems, the data center market is creating growth opportunities for its power solutions due to high demand from artificial intelligence and cloud providers.
For a long time, there are small nuclear reactors and opportunities from new single-aisle airplanes.
Given all this, it's hard not to be bullish. So if the stock goes on sale on August 1st, I will look to get more shares.
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