The Rolls-Royce share price has dropped and moved into a correction this month as the US-Iran war has escalated. It tumbled to a low of 1,108p, down by over 22% from the year-to-date high. This retreat may continue, potentially to 1,000p as the war impacts its civil aviation business.
Rolls-Royce share price has slumped amid the US-Iran war
The main reason why the Rolls-Royce stock price has tumbled this year is the ongoing Iran-US war, which has accelerated in the past few days. Yemen’s Houthi rebels have already joined the campaign, threatening oil flows in the Red Sea, which explains why crude oil prices continued rising.
Data compiled by IATA shows that jet fuel prices have continued rising in the past few weeks. The average jet fuel price rose to $197, up by 105% from the previous month.
As a result, there are signs that air travel, especially in the Middle East, is slowing down as Iran has intensified its attacks in the region. Some of the most affected airlines are Etihad, Qatar, and Emirates.
Other Asian airlines have remained under pressure as fuel prices have soared this year, with the ongoing shortage pushing some of them to cut their flights.
The weakness in the sector will likely continue in the coming weeks, especially if the war accelerates. This, in turn, will have an impact on Rolls-Royce’s business, which makes most of its money from long-term service contracts.
At the same time, the company’s margins may come under pressure as the cost of key inputs jump. For example, aluminum prices jumped on Monday after Iran attacked a major smelting plant in the Middle East. The prices of steel and other metals have continued rising in the past few weeks.
These events may make it hard for the company to achieve its future earnings as the guidance came before the war started.
The most recent results showed that Rolls-Royce’s business continued growing last year, with the revenue rising to over £20 billion from £17.8 billion in the previous year. Its gross profit soared to £5.1 billion, while its operating margin jumped to 17.3% from the previous 13.8%.
Most of this growth came from civil aviation, which made over £10.38 billion, while its operating profit rose to £2.1 billion. The defense business made £4.7 billion, up by 8% from a year earlier. Also, the power systems business made £4.89 billion, up by 19% from a year earlier.
The company believes that it has more room to grow, with its annual operating profit expected to be between £4 billion and £4.2 billion, and the free cash flow being between £3.6 billion and £3.8 billion this year. As such, the ongoing war and its impact on the aviation business will likely be impacted.
Still, on the positive side, the company has contended with these challenges in the past, including after Russia’s invasion of Ukraine in 2022. At the time, the stock dropped from 146p to a low of 65p and then bounced back.
Rolls-Royce stock has some major future catalysts, including the small modular reactor (SMR) and the narrow body industry.
Rolls-Royce stock price technical analysis
RR stock chart | Source: TradingView
The daily timeframe chart shows that the Rolls-Royce stock has plunged in the past few weeks, falling from the all-time high of 1,420p in February to the current 1,106p. It has dropped below the 50-day and 200-day Weighted Moving Averages (WMA).
The stock also dropped below the important support level at 1,191p, its lowest level in February this year. Top oscillators like the Relative Strength Index (RSI) and the Directional Movement Index (DMI) have continued falling.
Therefore, the stock will likely continue falling, potentially to the key support level at 1,000p and then resume the uptrend. This price also coincides with the lowest swing in November last year.
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