The past six months have been fantastic for shareholders in famed British engineering firm Rolls-Royce Holdings (LSE: RR). Its shares have skyrocketed since their lows of September 2022.
After showing such supreme strength since the autumn, is Mr Market getting carried away? More precisely, have Rolls-Royce shares got too far ahead of the company’s prospects?
Rolls-Royce stock surges
As I write, Rolls-Royce shares trade at 151.7p. This values the Derby-based aerospace and defence company at £12.7bn, making it a FTSE 100 stalwart.
Should you invest £1,000 in Angling Direct Plc right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Angling Direct Plc made the list?
However, back in September, this stock looked sickly. On 28 September 2022, it hit a 52-week low of 64.44p. That proved to be a turning point for this widely held and traded stock.
On 9 March, Rolls-Royce shares shot up to a 52-week high of 160p. That’s a remarkable return of 148.3% from their low in just over five months.
Even after dropping back to current levels, this stock has gained 135.4% since September’s low. Here’s how the share price has performed over seven periods:
Current price | 151.7p |
One day | +1.8% |
Five days | +4.6% |
One month | +1.4% |
Year to date | +62.8% |
Six months | +117.4% |
One year | +51.2% |
Five years | -49.1% |
Over six periods ranging from one day to one year, Rolls-Royce shares have delivered positive returns. What marvellous momentum for shareholders, given that the stock has almost halved over five years.
By the way, this makes Rolls-Royce stock the FTSE 100’s best performer in 2023, by a wide margin.
Rolls-Royce is a great business
I’m a big fan of Rolls-Royce as a business. Indeed, several of my family members in Derby have worked for this famous firm. But three things worry me about this stock today.
First, the shares trade on a sky-high price-to-earnings ratio of 76.4, which translates into an earnings yield of a mere 1.3%. This makes this stock among most expensive in the Footsie.
Second, as a value/income investor, I prefer shares that pay dividends. To preserve cash, Rolls-Royce cancelled its cash payout during 2020’s ‘pandemic panic’. Given the need to boost cash flow, I suspect bringing back dividends is the last thing on the board’s mind.
Third, thanks to the collapse in air travel in 2020/21, this storied group’s balance sheet includes net debt of £3.3bn. Then again, this has shrunk from £5.2bn at end-2021, due to disposals and higher cash flow.
Would I buy Rolls-Royce shares today?
Now for some positive points. After airmiles flown surged strongly in 2022, analysts expect this promising trend to continue in 2023/24. As revenues from the firm’s jet engines are linked to miles flown, this would deliver a big boost to Rolls-Royce’s future earnings.
Likewise, increased defence spending following Russia’s invasion of Ukraine should amplify growth in Rolls-Royce’s defence arm. And with 50,000 employees, 2022 revenue of £13.5bn, and a pedigree stretching back to 1904, this group is one great British business.
That said, I will pass on the opportunity to buy Rolls-Royce shares right now. As an old-school value investor, they look a bit too highly priced for me today!