Rolls-Royce share price spectacular rise continues: still a buy?

Rolls-Royce (LON: RR) share price has been a shining star in the FTSE 100 index in 2023. It has roared back by over 160% this year, outperforming the FTSE index, which has barely moved. It is now hovering near its highest point since December 2019. Along the way, the shares have surged by almost 600% from the lowest point during the pandemic.

The remarkable comeback

Rolls-Royce Holdings has had a remarkable comeback in the past few years. Before the pandemic, the company was in trouble as it handled the Trent 1000 issue which pushed it to a big loss.

The pandemic brought another headache to Rolls-Royce as governments imposed tough travel restrictions. This was a major issue for the company because it makes most of its money in the civil aviation industry.

Rolls-Royce sells aircraft engines and then enters long-term service contract with airlines. Some of its biggest customers are companies like Emirates, British Airways, and Qatar Airways.

In the aftermath, Rolls-Royce reported a big annual loss of over $4.3 billion in 2020. It also embarked on a cost-cutting process by laying off thousands of employees. As expected, it issued equity, which led to dilution and sold some of its business.

RR turnaround strategy

Now, the company is implementing a turnaround strategy under the new CEO who joined in February. The goal is to create a lean company that focuses on profitability. According to the FT, Rolls-Royce has decided to keep its power business, which makes engines for power plants and ships.

Some analysts believe that a divestiture of the power unit makes sense. The resulting company would be a big player in civil aviation and defence, two big industries. The management, however, is focused on cutting costs by merging key functions in the business.

Rolls-Royce is also increasing its focus on profitability. In this case, it hopes to improve the profit margins of the engines it sells to airlines. Historically, the company used to sell some engines at a loss and then make money in future services contracts.

I also believe that the company should consider moving back to making narrow-body engines. The number of narrow-order engines has grown sharply in the past few years. This growth has led to huge backlogs by companies like General Electric and Pratt & Whitney.

There are signs that Rolls-Royce’s strategy is doing well. In its investor day presentation, the management estimated that its mid-term operating profit will be between £2.5 billion and £2.8 billion. It also hopes to achieve free cash flow of between £2.8 billion and £3.1 billion.

Most importantly, the company aims to boost its civil aviation margins from about 2.5% to between 15% and 17%. In a statement, the CEO said:

“We are creating a high-performing, competitive, resilient and growing Rolls-Royce that will have the financial strength to control and shape its own destiny. We are confident in our ability to achieve these ambitions and have a clear and granular plan to deliver on our targets.”

Rolls-Royce share price forecast

RR chart by TradingView

Turning to the weekly chart, we see that the RR share price has been in a remarkable comeback in the past few months. It formed a golden cross pattern a few months ago. This pattern forms when the 50-week and 200-week moving averages crossover.

The shares have moved above the 61.8% Fibonacci Retracement point. Further, oscillators like momentum and the Relative Strength Index (RSI) have drifted upwards. Therefore, the outlook for the stock is bullish, with the next target being at 300p.