Rolls-Royce (LSE: RR) shares have taken to the sky in 2023 as investors turn bullish on the long-term outlook for the engine maker. As I type, the share price is up a whopping 53% this year.
Over a six-month timeframe, the stock has more than doubled! That makes Rolls-Royce the best-performing stock on the whole FTSE 100 over both timeframes.
However, at 149p today, it’s still 49% off the 295p price it was trading at five years ago.
So is this now a great time for me to buy Rolls shares?
One big reason to buy
Civil aerospace is Rolls-Royce’s single biggest division, accounting for nearly half of group revenues. So the most obvious tailwind for the shares recently has been the re-opening of China’s borders after three years of Covid restrictions.
This is highly significant for the company, as it needs planes powered by its engines in the skies. That’s because it sells these engines, then books recurring revenue by servicing them.
Management recently reported that large engine flying hours reached 65% of 2019 levels last year. That is very encouraging. And with international travel in China rebounding strongly, the firm now expects that figure to reach as high as 90% of pre-pandemic levels.
I wouldn’t be surprised to see a full recovery in engine flying hours in 2024.
Two more positives
Another reason to be optimistic is the appointment of new CEO Tufan Erginbilgic. The former BP executive has set about attempting to make the engineering group a leaner, more profitable enterprise.
Last week, the company closed down its artificial intelligence start-up after failing to find a buyer for it. This R2 Factory venture was only one year into its existence. But I think it’s unlikely to be the last casualty under Erginbilgic as he focuses on driving value in its core business segments.
Thirdly, one of the geopolitical results of the tragic war in Ukraine has been a massive increase in military spending by many nations. That means Rolls-Royce’s defence division, its second-largest unit by sales, looks poised for long-term growth.
This arm is a leading engine maker for the military transport market and the second largest provider of defence aero-engine products and services globally. It has 16,000 engines in service in over 100 countries, and an order backlog of £8.5bn at the end of last year.
And just last week, the firm announced that it will provide reactors for Australia’s fleet of nuclear-powered submarines. This is part of a trilateral agreement signed between Australia, the UK, and the US.
No financial details have been announced yet, but it’s likely to be a very sizeable deal spanning many years.
One reason to sell
One potential reason I might sell, if I were a shareholder, is the net debt the company still has on its balance sheet.
However, at £3.3bn, the amount looks more manageable than it did at £5.2bn at the end of 2021. But it’ll still need bringing down, and remains a key risk for me.
Overall though, I’m excited by the turnaround story unfolding at Britain’s flagship engine maker. I may add a few shares to my ISA once I have more capital to invest next month.
