Rolls-Royce‘s (LSE: RR.) shares performance in October has been hugely disappointing. Indeed, as the table below shows, it’s been the worst monthly performance for the stock since April 2022.
But what does this mean for me and my fellow shareholders? Is the party over, or is it a temporary setback? And for those looking to take a position in the group for the first time, could now be a brilliant buying opportunity to consider?
What’s going on?
Some of the loss of investor confidence appears to come from a warning on 23 October by French aircraft engine and parts supplier Safran. It reported a slowdown in the widebody aircraft engine market.
Also, there appears to be increasing anxiety about whether the current pace of AI data centre expansion can continue. This is potentially significant for Rolls-Royce’s power systems division. It’s been growing rapidly from increased demand for both its primary and back-up AI-related energy solutions.
However, this feels like a bit of an over-reaction to me. Why?
Nothing to see here
Primarily, the group earns revenue each time its engines are flown. Of course, a slowdown in the number of orders for new engines will impact future revenue growth. But with an estimated 5,000 engines being used regularly on large commercial airlines, I don’t see an immediate threat to earnings.
What about data centres? As recently as July, the group upgraded its expectations for power systems revenue growth from 20% to 25% a year, through until 2030.
I also think it’s significant that the group has other revenue streams that it can fall back on should there be a slowdown in these areas. For example, its defence division has an order backlog of £17.5bn. This is equivalent to more than three years of revenue.
More to come?
And looking further ahead, its small modular reactor (SMR) business could be a game changer. The group recent said: “Rolls‑Royce SMR has now been successful in every competitive European nuclear tender and is uniquely positioned to become a global market leader”.
Moreover, it was announced last week (28 October), that Rolls-Royce had secured a grant of £1.25bn from the UK government as part of a 10-year £2.5bn programme to develop a cleaner more fuel-efficient jet engine.
Final thoughts
To be honest, I don’t understand the investor nervousness. Personally, I think the group’s in tremendous shape. Indeed, I reckon the recent share price pullback could be an excellent buying opportunity to consider by new and existing investors alike.
Of course, I could be wrong. It’s undoubtedly true that its installed base of aircraft engines will be flown less if jet fuel costs continue to rise as a result of ongoing tension in the Strait of Hormuz. And if there’s an AI meltdown, the group will suffer.
Shareholders will learn more on 12 November, when the group’s due to provide its latest trading update. They will be hoping that its recent good run continues. Since 2023, it’s beaten earnings expectations on nine separate occasions.
I’m confident if Rolls-Royce confirms that it remains on track to deliver £4.7bn-£4.9bn of underlying operating profit this year, its share price will quickly recover. The events of October will then be seen as a minor setback rather than anything of great significance.
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James Beard owns shares in Rolls-Royce plc.
This story originally appeared on Motley Fool
