Rolls-Royce Holdings (LSE: RR.) shares didn’t move much on H1 results this morning. But they had spiked up in the week before.
Rolls had told us to expect a half that was “materially above” the City consensus. And that’s what we got.
The share price has doubled in the past 12 months, and it’s only about 50% down in five years now.
The results
There’s a few H1 headline takeaways for me.
Underlying operating profit is up to £673m, with free cash flow up to £356m.
And the board has raised its full-year guidance. It now expects operating profit to reach £1.2bn-£1.4bn by the end of the year, with free cash flow of £0.9bn-£1bn.
That’s a fair bit ahead of February’s guidance, of £0.8-£1bn in profit and £0.6-£0.8bn cash flow.
That was when the firm posted £0.5bn free cash flow for FY22. And it was the turnaround for many investors, with Rolls-Royce shares climbing as a result.
Cash and debt
With much of the business geared towards the second half, I didn’t expect a lot this time. But Rolls has under-promised and over-delivered.
Net debt was cut in the half, from £3.3bn to £2.8bn. That’s a lot better than I’d hoped for.
With last year’s debt cuts funded through disposals, I really wasn’t sure we’d see much more progress this year.
But I’m pleased the board has the right focus. At least, it’s the focus I like to see when I think of buying a stock. I just don’t like managers who are happy to sit on huge piles of debt for years.
Transformation
The board has been describing its moves as a transformation. Some firms use the term lightly, but in this case it does seem apt.
In fact, I don’t think Rolls is just putting right what went wrong in the pandemic. No, I reckon it’s also been able to address some underlying faults it already had.
Rolls-Royce shares had been falling for a good while before Covid arrived. The company looked a bit bloated and not as well focused as it should be.
I think it’s likely that some of the forced disposals of last year would have made good sense anyway.
More to come?
One thing does concern me a bit. Rolls-Royce is one of the most popular FTSE 100 shares right now. Daily trading volumes are big.
But isn’t that good? Well, in a way it is. But when a stock is super popular, I think the biggest risk is it could go off the boil. And if investors look elsewhere, we could see falls.
I also think assumptions that Rolls will continue to beat expectations are built in to today’s share price. And when that doesn’t happen one time, it could hurt.
Top growth stock
Saying that, I do think Rolls-Royce could be one of our best growth stocks for investors with a horizon of a decade, or so. I just fear the share price could turn flat for a while, or maybe worse.
