Rolls-Royce (LSE: RR) shares have been by far the biggest winner on the FTSE 100 over the last 12 months, up a thumping 216.05%. That’s way ahead of second-placed Marks & Spencer Group, which climbed ‘just’ 131.57% over the same period.
Performance figures like that are dangerous. Investors pile in hoping to make a fast buck, and risk taking a beating as the shares retrench.
However, this isn’t a struggling meme stock like GameStop and AMC Entertainment. Rolls-Royce is a serious business, with serious growth prospects, as well as a proud symbol of British engineering ingenuity.
Is it too late?
One reason the Rolls-Royce share price has risen so quickly is that it had fallen such a long way, after being hammered by repeated profit warnings, a bribery scandal, and pandemic lockdowns.
Last October, I decided it had been oversold and bought a small stake. If I’ve known it was going to take off like a rocket, I would have invested a lot, lot more.
Nothing lasts forever, and the great Rolls-Royce share price party was always going to stop at some point. I think that’s now happened.
While the stock is still up 7.78% over the last month, its performance chart suggests it has hit a plateau for now. Which is exactly what I would expect it to do. The share price has actually fallen 2.19% over the last week, and even though it’s been a bumpy time for markets as a whole, I think the dip is telling us something.
Anybody buying Rolls-Royce shares today expecting them to carry on flying to the stars should think again. It’s almost certainly not going to happen. Trading at 112.2 times earnings, it’s no longer a bargain. By that measure, it looks incredibly expensive. However, its earnings are expected to rise quite sharply from here.
In 2022, Rolls-Royce generated revenues of £13.52bn. They’re forecast to hit £14.55bn in 2023 and £15.69bn in 2024. As a result, Rolls-Royce’s forward price-to-earnings ratio for 2023 is a more amenable 30.5 times earnings. In 2024, it’s expected to fall to 22.3 times.
It’s got to slow down
When writing about Rolls-Royce, it’s obligatory to mention its net debt. However, that once daunting pile is shrinking rapidly. In 2022, management slashed it from £5.2bn to £3.3bn. It’s down to £2.85bn in the first half of this year and markets expect it to slide to £2.3bn by the end of the financial year and just £997m in 2024. That’s hardly terrifying for a company now valued at more than £18.5bn.
Rolls Royce turned £356m cash flow positive in H1, reversing last year’s £68m outflow. At some point, possibly this year, the dividend will be restored, although it won’t be much. Next year, the forecast yield is 0.68%. Tiny but likely to steadily grow.
Rolls-Royce is powering ahead on many fronts. It’s developing hydrogen-fuelled engines with easyJet, while boss Turfan Erginbilgic reckons it will win the race to develop the country’s first fleet of miniature nuclear plants “on merit”. Of course, he’s not a disinterested observer.
I think Rolls-Royce shares are still a red hot buy, but only with a minimum five or 10-year view. I’ll let the share price settle as the short-termists lose interest and drift away. Then I’ll buy it with the aim of holding for decades.
The post Are Rolls-Royce shares still a red hot buy? appeared first on The Motley Fool UK.
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More reading
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Harvey Jones has positions in Rolls-Royce Plc. 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.
