Rolls-Royce‘s (LSE:RR) share price has been one of the standout performers in 2023. At 224p per share, the FTSE 100 share has surged out of penny stock territory and is up 136% since 1 January.
But can Rolls shares continue gaining ground in the New Year? And should I buy the company for my portfolio? Here are three things to consider.
1. Flying airlines
Commercial airlines have seen passenger numbers soar since the end of Covid-19 lockdowns. And despite the patchy economic recovery and cost-of-living crisis, ticket sales have remained buoyant.
Strong civil aviation activity is essential for Rolls-Royce, which makes 48% of all revenues from activities like servicing aircraft engines.
The direction of travel is encouraging heading into 2024 but the recovery is still in danger. The threat of recession grows in Europe and the US, while the fight against high inflation also continues. Meanwhile China’s economy is worsening, casting a shadow over the increasingly important Asian marketplace.
2. Strength elsewhere
While civil aviation is important to Rolls it isn’t the whole story. The company provides a variety of engineering solutions to multiple industries, and progress elsewhere could help its shares to rise.
As with its Civil and Aerospace unit, sales and margins have also risen solidly at the firm’s Defence division. Trading here could continue to improve rapidly as well as countries boost arms spending in response to the deteriorating geopolitical landscape.
Further encouraging news from its development programmes could also give the company’s shares a boost. In September it reached another key milestone on development of a hydrogen-powered engine. Progress on its small nuclear reactor programme (for which it was shortlisted by the UK government last month) is also promising.
3. Transformation news
Positive signs on Rolls’ transformation have also lifted investor confidence in 2023. Chief executive Tufan Erginbilgiç is determined to keep the hard work going at the business he described as “a burning platform” he took over in January.
Last month he announced the axing of another 2,000 to 2,500 jobs and the merging of certain units to reduce costs. Streamlining (and asset sales) has gone a long way to reducing debt and boosting cash flow. Could more self-help measures be coming in 2024?
The verdict
On balance, I wouldn’t be shocked to see Rolls-Royce’s share price continue rising in 2023. But this doesn’t mean that I’d buy the FTSE firm for my portfolio today.
A sudden downturn in the civil aviation market could be devastating given that the company still has a decent amount of debt to pay back. Net debt stood at £2.8bn as of June. And a large chunk of its financial liabilities are to be paid pay back in 2024 and 2025, a fact that could scupper any plans it has to start paying dividends again.
I’m also worried about the firm’s high fixed cost base, which could leave it vulnerable in the event of another slump in global travel. Finally, supply chain problems continue to plague the aerospace sector and could scupper the company’s impressive momentum.
Largely speaking, Rolls has been a poor performer for investors for more than a decade. And while recent news is more encouraging, I’m not prepared to buy its shares just yet.
