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Rolls Royce share price could crash to 50p if this happens

on Jun 27, 2022
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  • Rolls-Royce share price has been in a strong bearish trend.
  • The company’s civil aviation business is doing well.
  • Rolls-Royce is also battling a significant wage and input inflation.

The Rolls Royce (LON: RR) share price has been in a strong bearish in the past few months. The stock has dropped by 35% this year and underperformed the FTSE 100 index and the SPDR industrial index (XLI). The industrial ETF has crashed by 15%.

Rolls-Royce is fighting Multiple battles

Rolls-Royce Holdings is one of the biggest industrial companies in the UK. The company has a presence in key industries like aviation, defense, and power. 

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Civil aviation is its core business. In it, the company manufactures jet engines, mostly those of wide-body aircraft like Airbus A380, Boeing 747, and Boeing 787. 

After selling these engines, the company then enters long-term contracts to service the aircraft. Tis is its most lucrative business since it provides reliable cash flow. 

The jet engine service makes money based on the number of flying hours. By law, an aircraft must go through an extensive servicing program to maintain its airworthiness. This explains why Rolls-Royce’s revenue dipped sharply during the pandemic.

Rolls-Royce Holdings is also a major player in the energy sector. As part of this industry, the company is currently working on small nuclear reactors in the UK. Further, the company also has a major presence in the millitary business.

The Rolls Royce share price has dropped sharply for several reasons. First, the company has seen a significant wage inflation. This month, the company decided to reward its staff with a 2000-pound bonus to deal with the rising cost of living. The offer also included a 4% wage hike. The firm said:

“This is a good deal for our colleagues that is fair and competitive, with an immediate cash lump sum to help them through the current exceptional economic climate. We will continue to talk to our people.”

In a statement last week, the union representing the company’s workers rejected the offer. They noted that the wage increase was lower than the country’s inflation of 9%.

At the same time, the company has seen the cost of its key raw materials rise. They include products like titanium, steel, and aluminum. 

Rolls Royce share price forecast

The daily chart shows that the RR share price has been in a strong bearish trend in the past few months. Along the way, the stock has dropped below the key support levels at 100p and 86.80p. These were the lowest levels in September and July, respectively. 

The shares have moved below the 25-day and 50-day moving averages. Therefore, the outlook for the stock is bearish since it recently formed a small double-top pattern. 

As such, a drop below the key support at 78.14p, will signal that bears have prevailed. This will in turn lead to more sell-off, potentially to the key support at 50p.