As this year draws to a close, it’s worth reflecting on which FTSE 100 stocks have performed well in a challenging climate. I’d put Rolls-Royce (LSE:RR.) shares right at the top of that list.
The aerospace and defence giant has been 2023’s standout performer from the UK’s leading index. Investors who entered positions at the start of the year would be sitting on a very handsome return today thanks to blistering growth in the Rolls-Royce share price over the past 12 months.
But, can the success story continue in the new year and should I add to my position in 2024?
Turnaround triumph
Rolls-Royce’s remarkable stock market performance has come about under fresh leadership. Less than a year into the job, new CEO Tufan Erginbilgiç has impressed shareholders with his clear strategy and ambition for the company’s future.
It hasn’t been an easy journey. Cost-cutting has been high on the former BP executive’s agenda. In the latest round of job cuts, a further 2,500 employees face redundancy. That’s on top of the 9,000 jobs that were slashed during the pandemic, which proved to be an exceptionally difficult time for the firm.
However, Erginbilgiç hopes further streamlining can add fuel to the transformation that’s already under way. By selling ancillary business interests and focusing on its core activities across its main divisions — Power Systems, Defence, and Civil Aerospace — the board hopes to quadruple profits over the coming five years.
This ambition translates into operating profit ranging from £2.5bn to £2.8bn and an operating margin of 13%-15% by 2027. This won’t be easy. Last year’s margins were razor thin at just 2.5%.
Indeed, some analysts question whether a sea change in profitability can be delivered without sacrificing market share. Nonetheless, Erginbilgiç believes Rolls-Royce “will capture market share every year, but in a profitable way”.
Obstacles to further growth
An unflinching focus on profitability might be music to shareholders’ ears, but it carries risks too. Rolls-Royce’s brand relies heavily on its association with high-calibre products. Cutting costs while preserving quality is a difficult balancing act.
Emirates Airline President Tim Clark recently criticised the durability of the Rolls-Royce’s Trent XWB-84 engines used in Airbus A350-900 passenger jets. Last month the Dubai airline held off making further orders, demanding improvements in quality and a reduction in maintenance costs.
Considering civil aerospace accounts for nearly half of the company’s revenue, Rolls-Royce can ill afford too many rifts with important customers. If more concerns about the durability of the firm’s engines come to light in 2024, this could trigger a sell-off in Rolls-Royce shares — especially after this year’s impressive gains.
Should I buy?
I invested in Rolls-Royce at the beginning of the year and I’m delighted I did. It’s been my best-performing stock this year by a country mile.
Granted, streamlining the business presents challenges. However, I admire Erginbilgiç’s vision for the company and I’ve been very impressed by his business acumen.
That said, I’m not expecting equally astronomic gains in 2024. Therefore, I won’t be adding to my position today as I think there are other shares with more attractive risk/reward profiles currently.
Nonetheless, I’ll continue to hold my existing shares. If Rolls-Royce flies even higher, I still stand to benefit.
