Rolls-Royce share price could soon fly, chart pattern shows

By: Crispus Nyaga
Crispus Nyaga
Crispus is an active trader, where he is followed and copied at Capital.com. He lives in Nairobi with his… read more.
on Sep 16, 2021
  • The Rolls-Royce share price has dropped by about 10% from its highest level this month.
  • This decline is mostly because the aviation industry sentiment has soured.
  • The bullish flag pattern on the four-hour chart points to a rebound.

The Rolls-Royce (LON: RR) share price jumped by more than 3% on Thursday after the company’s all-electric plane took to the sky for the first time. The stock also bounced back after a positive report by Ryanair, the giant budget airline. The shares are trading at 109p, which is about 4% above the lowest level this week.

Rolls Royce relief

Rolls-Royce Holdings is one of the biggest British conglomerates. The firm makes most of its money in the civil aviation industry, where its engines are used by many airlines globally. The company generates most of its income from the long-term service contracts it has with airlines like Lufthansa and Emirates. 

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In addition to civil aviation, the company manufactures military aircraft engines, making it one of the biggest British defence contractors. The smallest part of its business is its power business, where the company manufacturers engines for ships, yachts, and other power turbines. 

Therefore, its stock tends to track the performance of the aviation industry. And recently, things have not been good for the industry. For example, many companies like United Airlines, JetBlue, American Airlines, and Southwest have all lowered their forward guidance. They have cited lower bookings and higher flight cancellations. 

At the same time, the number of Delta Covid cases has jumped in most countries globally. For example, we have seen cases in strategic countries like China, Australia, and New Zealand. As such, the Rolls-Royce share price has struggled because investors expect that the recovery of the sector will take longer to recover. Indeed, the stock has declined by almost 10% from its highest level this month.

Still, there are some positives for the Rolls Royce share price. First, despite the current headwinds, the company’s order book remains steady and the number of flying aircrafts is increasing. Second, the stock appears to be undervalued when you compare it with its peers like General Electric and Safran. Additionally, a DCF valuation finds that the stock is about 35% undervalued.

Third, there is a possibility that the company will create more value by separating its power business. This case has been suggested by Causeway, a hedge fund that owns a large chuck in the company. Finally, the company could take a lead in developing electric aircraft. Indeed, the firm’s electric plane took its maiden flight today.

Rolls-Royce share price forecast

Rolls-Royce share price

The four-hour chart shows that all is not lost for the RR share price. For one, the stock bounced back on Thursday at an important place. This level was slightly above the 50% Fibonacci retracement level. Also, the shares have formed a bullish flag pattern that is shown in red. In price action analysis, a bullish flag pattern is usually a bullish signal. 

Therefore, the Rolls Royce stock price will likely break out higher in the coming days as investors target this month’s high of 120p.

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