Rolls-Royce shares: could I double my money amid clearing skies?

Rolls-Royce (LSE:RR) shares have been rallying since late summer. This is especially volatile FTSE 100 The stock is down 1% over 12 months, but up 49% over six months. But this is nothing compared to the long-term fluctuations in stock prices. Over three years, the stock fell 50%.

So, why is this? And why do I think stocks can continue to rise?

The challenge of Covid

Covid-19 is largely responsible for Rolls’ fortunes over the past three years. Engine-flying hours (EFH) account for a large proportion of the company’s revenue. And, as the pandemic saw air traffic plummet, the income from EFH increased.

The tech giant recently announced that EFH was around 65% of pre-pandemic levels in the four months to the end of October.

Even so, two other business segments, power systems and defense, performed well.

What has changed?

Liz Truss’s inflation-driven growth plan has sparked global concerns, raising concerns about the cost of borrowing for debt-ridden stocks like Rolls-Royce. But the economic climate has certainly improved since then.

And there is another reason to be positive, which I think should increase the income in the coming years.

Tailwind in flight:

China’s reopening represents a major boost for Rolls and EFH. In China, wide planes with two aisles and Rolls-Royce engines are often used for short-haul routes. But by 2022, flying hours will remain at around 30% of pre-pandemic levels. It is worth noting that Rolls engines tend to be used in wide body jets.

New orders:

About 13,700 flights were launched during the pandemic – manything that is not suitable for service. So, with the demand to fly back, many airlines are buying new planes. Airlines like Air India, Unitedand American a sizable order for new jets by 2022. The first wants to increase its fleet to 500.

Fresh demand has been highlighted by easyJet this week. The company recorded a 161% year-over-year increase in customer orders for summer 2023.

Double my money?

Estimating how much Rolls is worth is difficult because cash flow from operating activities has been negative in recent years. However, a discounted cash flow calculation, looking at cash flow over 10 years, shows the stock could be undervalued by up to 50%.

The data suggests a range of share prices of 88.8p-238p. The variation that the size reflects The challenge is around forecasting what will happen to cash flow in the coming year.

As suggested, and despite the £4bn debt burden, I am convinced. I expect growth in all three segments due to returning air travel demand, increasing emphasis on fuel efficient and carbon neutral power systems, and due to geopolitical tensions increasing defense spending.

I am already a shareholder of Rolls-Royce. I would buy more of this stock at 112p because I argue it can really outperform the index this year. Doubling the money is definitely possible, but I don’t expect it anytime soon.