The Rolls-Royce (LSE: RR) share price has crushed every other stock on the FTSE 100 over the last year, rising 191.47%. Over the same period, the index as a whole has fallen 0.76%.
Marks & Spencer Group is the second best performer, but it’s up ‘only’ 91.37%. Rolls-Royce is smashing it. That tempts and terrifies me in equal measure. I’m torn between fear of missing out (good old FOMO) and a dread of buying into the hype.
2023’s best stock
I haven’t totally missed out, having bought a small stake in Rolls in October 2022, just before its shares hit warp speed. I sold a month ago, as I needed some cash and was happy to bank my 179% profit. The stock is up another 28.89% since then. I miss it.
After completing the transfer of some legacy company pensions into a self-invested personal plan (SIPP), I now have some cash at my disposal and I’m tempted to use it to buy Rolls-Royce shares. Or should I accept my moment has passed?
One figure worries me. Rolls-Royce shares currently trade at a blockbuster 132.5 times earnings. That’s what happens when a stock goes on a tear. By comparison, the price/earnings ratio for the FTSE 100 as a whole is just 9.2 times.
Yet on closer inspection, that valuation isn’t too terrifying. Yesterday, CEO Tufan Erginbilgic announced plans to quadruple profits to £2.5bn by 2027. He’ll also be exiting less profitable areas and raising £1.5bn from disposals. It seems a long time since he was deriding Rolls-Royce as a “burning platform” and declaring that “every investment we make, we destroy value.” It was January this year.
This stock needs a long-term view
Markets love Erginbilgic but in a way he’s been lucky. He’s benefited from contracts set up under predecessor Warren East, as well as engineering issues at US aerospace manufacturer Pratt & Whitney. The company’s net debt no longer spooks investors. It fell from £5.2bn in 2021 to £3.3bn in 2022, due to disposals and improved cash flow. That was on East’s watch.
Today, markets are really into Erginbilgic. This is reflected in the group’s forecast P/E of a more modest 35.2 times earnings for 2023 and 25.7 times for 2024. I can live with those numbers. Markets are also looking forward to dividend resumption, albeit at low levels. The forecast yield for 2023 is 0.01%, edging up to 0.58% by 2024.
The CEO has impressed by talking tough and aiming high. The risk is that he does not deliver, and profits do not quadruple. To answer my own question, yes, Rolls-Royce mania has gone too far, I think. It’s inevitable after its recent run. Today’s share price has been whipped up by lashings of speculative froth. The problem is, I was thinking the same thing a month ago.
I’m delighted to see a big FTSE 100 blue-chip generating genuine excitement. I’ll still buy it, but this time I’ll aim to hold for years and years rather than grab a quick profit and run. If the mania subsides and the stock falls, I’ll wait for the fundamentals to assert themselves.
The post A P/E of 133 and no dividend! Has Rolls-Royce share price mania gone too far? appeared first on The Motley Fool UK.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
