Rolls-Royce’s share price is still over £3! Have I missed a golden opportunity?

Despite Rolls-Royce’s dramatic share price rise, the stock still looks undervalued to me, and the company is targeting major growth to 2027.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Hydrogen testing at DLR Cologne

Image source: Rolls-Royce Holdings plc

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Rolls-Royce (LSE: RR.) share price is still over £3, having nearly tripled in value over the past 12 months.

After such a rise, some investors may buy the stock simply to try to avoid missing out on further gains. Others may avoid the shares, waiting for a drop in price before they buy, if they do at all.

In my view, neither approach is right in the context of long-term investment. The only question I ask myself in this situation is whether value is still left in the stock.

Should you invest £1,000 in Rolls-Royce right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Rolls-Royce made the list?

See the 6 stocks

If the answer is ‘yes’, then I will consider buying it.

Is there value left in the share price?

Just because a stock has risen sharply in price does not mean it is overvalued. The company may simply be worth more now than it was before.

In fact, it could well be worth even more than the current share price reflects.

Rolls-Royce currently trades on the key price-to-earnings (P/E) ratio measurement at 16.1. This is by far the lowest in its peer group, which has an average P/E of 37.5.

The group comprises BAE Systems (at 18.8), Honeywell International (22.7), RTX Corporation (37.5), and Babcock International (71.1).

On this measure, Rolls-Royce shares look very undervalued.

A discounted cash flow model shows them to be around 62% undervalued at the present price of £3.18. A fair value would be about £8.37.

Created with Highcharts 11.4.3Rolls-Royce Plc PriceZoom1M3M6MYTD1Y5Y10YALL12 Feb 201912 Feb 2024Zoom ▾Jul '19Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '242020202020212021202220222023202320242…20242…www.fool.co.uk

This does not necessarily mean that the shares will ever reach that level. But it does underline to me again that they are very good value indeed.

Is the business on a strong uptrend?

Rolls-Royce understands that it must ‘upgrade’ its business to effect a major upward revaluation of its shares. At its Capital Markets Day on 28 November, it said a key target was achieving that investment-grade profile.

This gives a company an elite status in global markets, allowing it greater and more preferential access to capital. The new capital can then be used to drive greater growth.

Rolls-Royce is currently rated BB+ by Standard & Poor’s ratings agency – one rung below investment grade. Moody’s agency rates it Ba2 – two rungs below investment grade.

To this end of upgrading its business, December saw it unveil financial targets to be achieved by 2027. These include £2.5bn-£2.8bn in operating profit, a 13%-15% operating margin, and a 16%-18% return on capital.

It also aims for free cash flow of £2.8bn-£3.1bn by that time. This cash pile can provide another major boost to growth.

One risk in the stock is that another pandemic would cripple its civil aerospace revenues (comprising 43% of its business). Additionally, a major problem in any of its key defence sector products would be very costly to it.

Will I buy it?

Provided that I can see value remaining in a stock, it is never too late for me to buy it.

Investing for the long term allows a company time to realise this value. It also allows for the flattening out over time of any short-term shocks seen in a market or individual stock.

I see such value in Rolls-Royce, meaning that I would usually buy the stock.

However, I already own shares in another company in the sector — BAE Systems – so buying Rolls-Royce would unbalance my portfolio.

Should you buy Rolls-Royce now?

Don’t make any big decisions yet.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.

And he believes they could bring spectacular returns over the next decade.

Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows...

When such enormous changes hit a big industry, informed investors can potentially get rich.

So, with his new report, Mark’s aiming to put more investors in this enviable position.

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

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.

Simon Watkins has positions in BAE Systems. The Motley Fool UK has recommended BAE Systems and Rolls-Royce Plc. 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.

More on Investing Articles

Two employees sat at desk welcoming customer to a Tesla car showroom
Investing Articles

Could Tesla stock be a brilliant bargain in plain sight?

Christopher Ruane sees some things to like about Tesla, but as its vehicle revenues have gone into sharp decline, is…

Read more »

British coins and bank notes scattered on a surface
Investing Articles

3 cheap FTSE 250 stocks with big dividends to consider buying right now

The FTSE 250's loaded with so many big dividend yields it's hard to know where to start. These three have…

Read more »

Rolls-Royce's Pearl 10X engine series
Investing Articles

Up 585%, could Rolls-Royce shares still go higher?

Christopher Ruane likes the Rolls-Royce business but is not so convinced by the value its current share price offers him.…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

I reckon a bull market’s coming! Here’s what I’m buying for my Stocks and Shares ISA

Hoping to capitalise on what he believes is an undervalued UK stock market, our writer’s added more of this FTSE…

Read more »

piggy bank, searching with binoculars
Investing Articles

The UK stock market looks undervalued to me. Here’s 1 growth stock to consider for a SIPP

Our writer explains why he thinks the UK stock market’s currently in bargain territory, and identifies one share potentially worthy…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

Meet the FTSE 100 stock I’ve been buying this week

Despite a strong week for the FTSE 100, one stock fell 7% in a day. And Stephen Wright took the…

Read more »

Businesswoman calculating finances in an office
Investing Articles

1 of my favourite growth stocks crashed 20% in a day this week. Here’s what I’m doing

Stephen Wright thinks the market’s overreacting to short-term growth challenges in one of his favourite UK stocks, creating a buying…

Read more »

Young female hand showing five fingers.
Investing Articles

Here’s a 5-stock high-yielding portfolio that could generate passive income of £1,500 a year

Those wanting to earn generous levels of passive income from their Stocks and Shares ISA could take a closer look…

Read more »