Can I double my money with Rolls-Royce shares again?

Rolls-Royce shares are the investment story of the year with 162% growth. Dr James Fox explores what’s next for the engineering giant.

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Hydrogen testing at DLR Cologne

Image source: Rolls-Royce Holdings plc

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I sold my Rolls-Royce (LSE:RR) shares earlier in the year. It was a gradual reduction in my position, but I probably came close to doubling my money with the engineering stock.

Of course, I possibly sold some or all of my holdings too early. However, I wasn’t aware of the sheer strength of the positive momentum behind the stock. I also underestimated the company’s ability to continue outperforming the market.

So, the question today is ‘could I double my money again from here’?

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Created with Highcharts 11.4.3Rolls-Royce Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Valuations

The current share price infers a forward price-to-earnings of 29 times. That’s clearly not overly cheap, but it’s important to highlight that Rolls remains a company in transition. It’s getting back on its feet after being severely damaged by the pandemic.

Looking forward, however, valuation based on earnings forecasts improves. A forward multiple of 16.5 times isn’t particularly expensive.

202320242025
EPS forecast (p)7.179.8212.71
P/E at current share price29.321.316.5
Rolls-Royce P/E

By comparison, Rolls’s rival in the US, General Electric, currently trades at 14.2 times forward earnings for 2023. However, it looks increasingly expensive in the coming years due to a falling earnings forecast. Interestingly, General Electric’s FY2025 P/E would be almost on par with Rolls-Royce’s.

202320242025
EPS forecast (c)7.685.196.63
P/E at current share price14.22116.4
General Electric P/E

We can also look at metrics, including the price-to-sales ratio, to provide further near-term comparisons. The below chart shows that Rolls-Royce trades at a discount to General Electric, and Safran — which General Electric recently partnered with.

Created at TradingView

Although the valuation metrics are highly appealing, they do not imply that the fair value should currently be twice the current price. That’s not to say the company won’t continue to grow earnings beyond the medium term, and thus earnings a higher valuation.

Long-term growth

Rolls-Royce earns the vast majority of its revenues from three segments: civil aviation, defence, and power systems. The biggest of these, by some distance, is civil aviation.

As such, the investment hypothesis for Rolls-Royce is heavily linked to this sector. Thankfully, the civil aviation sector is expected to receive a major boost over the next two decades, primarily from a growing global middle class.

For example, Airbus’s Global Market Forecast for the next two decades predicts demand for over 40,000 new commercial jets between 2023 and 2042. However, the vast majority of this demand is for single-body aircrafts — Rolls stopped producing engines for this market a decade ago.

The company’s decision to leave the market could prove a huge mistake looking at the forecast. CEO Tufan Erginbilgiç doesn’t see Rolls re-entering the sector for a decade, primarily due to the logistical challenges associated with partnering with aircraft manufacturers and other parts of the supply chain.

So, could Rolls-Royce shares double from here? I really wouldn’t be surprised to see shares trade around £5 in three or four years time. However, there are plenty of variables, including its ability to benefit from growing civil aviation demand and investor sentiment.

Right now, I don’t have a position in Rolls, but I’ll consider it when I have more capital available.

But here’s another bargain investment that looks absurdly dirt-cheap:

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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.

James Fox has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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