Rolls-Royce (LSE: RR.) shares have had a magnificent run in 2023. Year to date, they’re up over 200%.
I don’t own Rolls-Royce in my portfolio so I’ve missed out on these blockbuster gains. But should I buy the stock now? Let’s discuss.
Profits are soaring
There’s an awful lot to like about Rolls-Royce from an investment perspective at present.
For a start, CEO Tufan Erginbilgic is doing a really good job transforming the company and profits are soaring.
For 2024, analysts expect earnings per share to come in at 12.1p versus a forecast of 9.4p for 2023.
That would represent growth of 29%. And Mr Erginbilgic keeps upping the guidance.
Last month, he vowed to deliver up to £2.8bn of operating profit in the medium term (versus £0.9bn in 2022) by increasing the margin on the company’s civil aerospace business to between 15% and 17% from 2.5% last year.
“We are setting compelling and achievable financial targets for the mid-term which will take Rolls-Royce significantly beyond any previous financial performance,” he said.
If there’s one thing that can drive a stock higher, its higher profit guidance.
Share price targets are rising
Second, brokers are really bullish on the stock right now.
Recently, JP Morgan upgraded the stock to ‘overweight’ (which means buy) from ‘neutral’, saying that a much higher percentage of the company’s long-term service agreement advances will now convert into profit.
JP Morgan also raised its target price to 400p from 235p.
Meanwhile, Goldman Sachs just reinstated the stock with a ‘buy’ rating and a price target 370p. “We now see cash and earnings momentum going forward,” it wrote.
This kind of positive broker activity can also have a positive impact on a stock.
The returns of dividends?
Third, dividends could be returning soon. In November, the company said that it will resume shareholder distributions once it has strengthened its balance sheet.
Currently, analysts forecast a payout of 2.5p per share for 2024. That equates to a yield of 0.9% at today’s share price.
A return of the dividend could also boost the stock’s appeal.
Upward trend
Finally, the share price is in a strong uptrend. In technical terms, the stock has ‘momentum’.
This can’t be ignored as trends can be persistent. So overall, there are plenty of reasons to be bullish.
My view
Having said that, there are few things that are missing here for me as a long-term ‘quality’ investor who likes to invest in the world’s best businesses (at a reasonable price).
One is a long-term track record when it comes to creating wealth for investors.
Ultimately, Rolls-Royce has a poor track record when it comes to profitability. In the past, it has often lost a lot of money and destroyed shareholder value.
I’d need to see more consistency in profit generation before investing.
Another is a reasonable valuation. Currently, the price-to-earnings (P/E) ratio here is about 30 using the 2023 earnings forecast and 24 using the 2024 forecast.
I see these multiples as quite high given the poor track record I mentioned above. In light of these issues, I think there are better stocks to buy for my portfolio for 2024.
