On November 16th 2021, at Boscombe Down, Wiltshire, in the South of England, an electric aircraft from Rolls-Royce Holdings (LON: RR) called the Spirit of Innovation took to the sky and reached a top speed of 330 miles per hour and maintained that speed for 15 kilometres. According to a press release, the speed was no less than 182 miles per hour faster than any electric plane had travelled before over a similar distance. The company is awaiting official certification of the record. In addition, the aircraft reached a top speed of 387.4 miles per hour, which the company says is also a new record.
But then Rolls-Royce Holdings is a quite different animal these days. Between 2018 and October 2020, Rolls-Royce Holdings shares lost almost 90 per cent of their value. That was a difficult time. The Covid crisis developed at the latter end of the tough two year period, and that really did add salt to the wound.
Shares have recovered significantly since last’s year’s low but still languish at only a little more than a third of the 2018 peak.
Some might say bargain-hunting investors have missed the opportunity, that the time to buy was a year ago, but I think that is being wise in hindsight. You show me an investor who consistently gets their timing just right, and I will talk about luck and regression to the mean.
I don’t think the Rolls-Royce share price recovery is over; indeed, I would say a good case could be made to say it has only just begun.
And the rationale for my bullish stance on Rolls-Royce Holdings shares can be summed up with one word: sustainability. Or if you want more detail, here are two words: climate change.
Ever since Warren East took over as CEO in 2015, the company has been shifting emphasis to sustainability. Take a look at its website, and you will see it is awash with green thinking — net-zero, electric planes, small modular nuclear power, hydrogen and energy efficiency.
The adoption of sustainability isn’t opportunistic or superficial; I think it is real and has become embedded in the company’s culture.
Adopting sustainability isn’t easy for a company like Rolls-Royce Holdings with its legacy in gas-powered engines. I believe many of its rivals have left it too late, but Rolls Royce Holdings was ahead of the game; its foresight will look increasing inspired over the next few years.
I shall come clean and confess; I am not a fan of nuclear power; even small modular nuclear power worries me. The word ‘small’ is a misnomer; these small modular nuclear reactors are actually massive; they are just not as massive as traditional nuclear reactors. I also fret about the cost of the reactors, but despite my cynicism, which I know many people disagree with, I remain bullish about Rolls-Royce’s move in this direction. Whatever the rights and wrongs, the momentum is with small modular nuclear reactors, and Rolls Royce stands to benefit.
Besides, the future is uncertain; you need to experiment to flourish. Small modular nuclear is a part of the Rolls Royce programme; it doesn’t define it.
I believe electric aircraft for short-haul and hydrogen-powered for longer distances is where the long term opportunity lies, and the company is embracing both.
It was forced to tap shareholders for cash at the height of the pandemic, which didn’t help shares. But transitioning from gas to sustainable energy was never going to be cheap, and with the company losing a lot of money, the fundraising was a sensible move.
Speaking more generally, the transition to sustainability will require a lot of upfront money, but I believe the long term potential is enormous. Rolls Royce Holdings is a good example of a company that can and indeed already is grabbing this opportunity. And it does this from a relatively low P/E ratio. So I think Rolls-Royce Holdings shares look interesting indeed.