Rolls-Royce (LSE: RR) shares have taken the FTSE 100 by storm over the last couple of years. In fact, they’ve risen an incredible 428% in just under 18 months!
Here, I’ll ask whether I should stick with my shares or twist and buy more.
On top form again
At the start of 2024, the Rolls share price was 299p. As I write, it’s at 372p, which represents a gain of 24.4%. That means £5,000 invested in the stock would have grown to around £6,220.
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The company hasn’t restored its dividend yet, so I’d have no cash payouts to add to my total. Even still, that’s an exceptional return in just over two months.
Indeed, only shares of Footsie insurer Beazley (up 25%) beat that so far in 2024.
Needless to say, I wish I’d invested again in early January. Alas, I didn’t.
Aiming high
Clearly, the company has been undergoing a transformation under CEO Tufan Erginbilgiç. Last year, revenue rose from £12.7bn to £15.4bn, while underlying profit increased by nearly £1bn to £1.6bn.
Margins expanded meaningfully across all three divisions, helping the group’s underlying operating margin reach 10.3%, a more than doubling from 2022.
For 2024, Rolls-Royce sees underlying profits potentially topping £2bn. And between 2022 and 2027, it aims to quadruple profits. So it’s easy to see why investors are bullish.
Valuation
When a share price triples then quadruples in a relatively short space of time, we’re likely to see a stretched valuation. Is that the case here?
Well, here are the latest broker forecasts for the next three years.
| 2024 | 2025 | 2026 | |
| Revenue | £16.7bn | £17.9bn | £19.2bn |
| Net income | £1.1bn | £1.4bn | £1.7bn |
| Free cash flow | £1.9bn | £2.2bn | £2.6bn |
Based on forecasts, we get the following forward-looking multiples.
| 2024 | 2025 | 2026 | |
| Price-to-earnings (P/E) ratio | 27.4 | 21.7 | 18.7 |
| Price-to-free-cash-flow (P/FCF) ratio | 17.5 | 15.4 | 13.0 |
Based on this multi-year timeframe, the stock doesn’t look particularly expensive to me. However, it also probably doesn’t leave much margin of safety were the company to encounter a major operational setback, especially in its key civil aerospace division.
After all, the firm is vulnerable to events outside of its control, notably further sudden lockdowns in China. And it still has significant liabilities.
Will I buy more shares in March?
We are unlocking our full potential as a high-performing, competitive, resilient, and growing Rolls-Royce
Tufan Erginbilgiç
Despite these risks, I’m looking forward to a number of potential positive catalysts over the next few years. These include:
- Global air travel soaring past pre-pandemic levels
- Increasing global defence spending
- Regaining its investment-grade status with the ratings agencies
- Return of the dividend
- Progress on its small modular reactor (SMR) technology
- Further new aircraft demand from China and Africa
I invested in Rolls-Royce shares at £1.49 nearly 12 months ago after the multi-year turnaround potential eventually seduced me.
But I wish I’d acted sooner. I dithered because I was still put off somewhat by the previous years of underperformance and the significant debt pile. The share price was rising higher and I waited for a pullback that never came before finally pushing the buy button.
Of course, hindsight is 20/20 vision, as they say. Today, I’d like to buy more shares. But I find myself waiting for that illusive share price pullback once again.
