The Rolls-Royce share price is below £1… but I think I can do better

With a share price below £1, Rolls-Royce shares look cheap. But Stephen Wright thinks that he can get more for his money with a different FTSE 100 stock.

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Key Points

  • Rolls-Royce (£7.89bn) and Rightmove (£5.37bn) have similar market caps.
  • Rolls-Royce has £3.5bn in net debt, while Rightmove has £37m in net cash.
  • Rolls-Royce makes £500m/year using £5.1bn in fixed assets. Righmove makes £183m/year using £12m in fixed assets.

The Rolls-Royce (LSE:RR) share price is still under £1. That looks cheap. But with around 8.37bn shares outstanding, the current share price values the entire company at around £7.89bn.

I’ve been seeing a lot of optimism around Rolls-Royce shares at the moment. As an investor looking at UK stocks, though, I think that I can do better. One FTSE 100 stock that I think is more attractive than Rolls-Royce is Rightmove (LSE:RMV).

Valuation

Rightmove’s share price is currently around £6.37. That implies a price of roughly £5.37bn for the entire company. But the valuation story is a bit more complicated than just the share price.

In addition to paying £7.89bn to acquire the company, an investor in Rolls-Royce would also take on around £3.5bn in net debt. Adding that to the price gives a total outlay for an investor of around £11.3bn.

Rightmove, by contrast, has enough cash on hand to cover all of its debts. An investor buying Rightmove would acquire around £37m in net cash. Subtracting this from the market cap leaves a net outlay of around £5bn for Rightmove.

From an investment perspective, then, Rolls-Royce is slightly more than twice as expensive as Rightmove. The question for me is therefore whether or not Rolls-Royce is likely to produce more than twice as much cash as Rightmove in the future. I think this is unlikely

Efficiency

The reason that I doubt that Rolls-Royce can generate more than double the cash that Rightmove can is that Rolls-Royce is a more expensive business to run.

The company has around £5.1bn in net property, plant, and equipment and uses around £500m per year. Last year, it used these assets to generate around £120m in net income.

Rightmove is much more efficient. It has around £12m in net property, plant, and equipment and uses around £800,000 per year. Last year, the company used these assets to generate around £183m in net income.

In other words, Rightmove is a more efficient business than Rolls-Royce is. While Rolls-Royce clearly has the capacity to generate more cash, I believe that the amount of cash that the company will need to maintain its operations will mean that Rightmove shares prove to be a better investment for me over time.

Conclusion

Overall, I think that Rightmove is a superior offering at current prices. In the near future, I think that there’s risk here, though.

The Rolls-Royce share price might get a bit of a push. The company’s exposure to nuclear power generation aligns well with the UK government’s energy intentions and might generate some excitement, pushing the stock higher.

Equally, Rightmove shares might struggle a bit over the next few months as tighter mortgage lending weighs on the UK housing market. With a longer-term focus, though, I think that Rightmove’s lack of debt and superior efficiency make its shares more attractive, even with the Rolls-Royce share price below £1.

My plan is to follow Warren Buffett’s advice and use the pessimism around Rightmove to be greedy when others are fearful. I’m staying away from the optimism around Rolls-Royce, though, being fearful while others are starting to get greedy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Rightmove. 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.

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