Rolls-Royce share price has wavered in the past few days as demand for UK stocks has waned.
After soaring to a record high of 1,531p last week, it ended the week at 1,406p.
Still, a potential catalyst may help push the stock back to a record high.
Rolls-Royce is working on a narrow-body engine
RR stock price has been in a strong upward trend in the past few years, making it one of the best performers in the FTSE 100 Index.
This rally happened because of its strong tailwinds in key industries like civil aviation, small modular reactors (SMR), artificial intelligence’s data centers, and defense.
The company is now plotting a major strategy that, if successful, will help it make billions of dollars in the next decade and make it a major competitor to General Electric and Pratt & Whitney.
It is working on the UltraFan 30, a narrow-body engine that will be available to the successors of Airbus A320 and Boeing 737 Max planes.
These narrow-body planes have become popular among customers in the past few years. Indeed, the two brands are the backbone of Airbus and Boeing.
This is a major development for Rolls-Royce, a company that abandoned the industry over a decade ago. That move has helped it boost its market share in the wide-body engines. In a note, an analyst said:
“The wide-body market offers limited growth potential for the company. To meaningfully expand Rolls-Royce’s core aero-engine business, it must prioritize the narrow-body market.”
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Narrow engine business faces some key risks
The main challenge for this ambition, however, is that building a new engine will be highly expensive and time consuming. At a minimum, it will require billions of pounds to execute, with executives hoping that the UK government will chip in.
However, hopes that a funding deal will be announced at the Farnborough air show have retreated because of the ongoing government changes. Prime Minister Keir Starmer announced that he would resign last week.
Rolls-Royce’s CEO argues that the project will generate over 40,000 skilled jobs and over 120 billion pounds for the British government. However, it will be hard for the Labour Party to sell that idea, considering that the company has a market cap of over $152 billion and is spending billions of dollars in paying dividends a year.
The company also needs a partner to help it manufacture its engines at scale and the confidence of Airbus and Boeing. A potential partner might be Pratt & Whitney, its partner in the International Aero Engines Group.
On the positive side, these manufacturers will likely welcome another engine manufacturer, especially because of the recent challenges with Pratt & Whitney.
Rolls-Royce share price technical analysis
RR stock chart | Source: TradingView
Technical analysis suggests that the Rolls-Royce stock price has more upside to go. It remains above the 100-day and 50-day moving averages and has retested the key support of 1,420p, its highest point in February this year. This pattern is known as a break-and-retest and is one of the most common continuation signs in technical analysis.
Therefore, the stock will likely resume the uptrend since the civil aviation industry is improving. It is also benefiting from the rising demand for its power equipment in data centers and the SMR boom. A move above the year-to-date high of 1,520p will point to more gains.
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