Rolls-Royce (LSE: RR) shares are a hot investment at the moment. Last week, for example, Rolls was the third most bought stock on Hargreaves Lansdown.
Is this a stock I should buy for my own portfolio? Let’s take a look at the investment case.
4 reasons to buy Rolls-Royce shares now
I can see quite a few reasons to buy Rolls-Royce shares for 2022 and beyond.
The first is that the company is well-placed to benefit from the recovery in air travel. Rolls-Royce generates a large chunk of its revenues from servicing commercial jet engines so as we all fly more in the years ahead (assuming no more Covid-19 setbacks), its revenues should rise too.
It’s worth noting that in the US, air travel demand is surging right now. Indeed, Delta Air Lines recently said it was seeing an ‘unparalleled’ increase in demand, resulting in the highest ticket sales in the company’s history.
Another reason to like Rolls-Royce is that it has recently completed a restructuring programme (a year ahead of schedule). As a result, it’s now a more efficient business. CEO Warren East believes the restructuring positions the group well for the pickup in air travel.
Additionally, Rolls-Royce is currently making investments in a number of early-stage, net-zero-related businesses. One example is its Rolls-Royce Electrical business. Here, it is working on electric drive systems for aircraft. The group believes these businesses could potentially add £5bn to its revenues by the early 2030s.
Finally, there’s been some interesting takeover talk. According to a blog post on a financial website last week, the company could be about to be involved in a ‘significant corporate transaction’ with an unidentified suitor. This news has already pushed the share price up. However, if a deal does happen, the share price could go higher.
So overall, there’s quite a lot to be excited about here.
Risks to the share price
Having said that, there are a few things that concern me in relation to Rolls-Royce shares. One is the risks surrounding supply chains and inflation. I’d expect to see some supply chain/cost issues in 2022. It’s worth noting that around 20% of the group’s titanium comes from Russia.
Another concern is the fact that East is set to step down at the end of 2022. This adds some uncertainty, as he has been CEO for eight years.
Meanwhile, looking at the valuation, the stock doesn’t look cheap. At present, analysts expect earnings per share of 5.77p for 2023. That puts the stock on a forward-looking P/E ratio of about 17.5. I don’t see a lot of value at that multiple.
Last, but not least, a look at the financials reveals that Rolls-Royce has a poor track record when it comes to revenue and profit growth. In other words, it’s not a ‘high-quality’ company.
As a ‘quality’ investor, I like to invest in businesses that are consistently delivering top- and bottom-line growth, and are highly profitable. I’ve found these kinds of companies tend to generate the best returns over the long run. Rolls-Royce doesn’t meet my criteria given its patchy track record.
Rolls-Royce shares: my move now
Weighing everything up, I’m going to leave Rolls-Royce shares on my watchlist for now. All things considered, I think there are better stocks to buy today.
