This could be the best value FTSE 100 stock!

Investors often say the FTSE 100 is a great place to find value. However, doing so isn’t always straightforward. But here’s my top pick.

| 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.

Image source: Getty Images

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 FTSE 100 has been going sideways for years. While there’s certainly an argument that British stocks are undervalued, many of them offer very little in the way of growth.

Rolls-Royce (LSE:RR) is a different proposition. It has gone from fears that it would never recover during the pandemic to a company that just keeps on beating earnings estimates. But why do I think it could still be the best value FTSE 100 stock? Let’s take a look.

Valuations

Rolls-Royce isn’t ‘expensive’ even after surging around 500% from its lows 18 months ago. The stock is currently trading at 28.1 times forward earnings. That’s notably cheaper than a couple of months ago and it’s because analysts’ estimates for the company’s earnings just keeps on getting stronger.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

202420252026
Earnings per share (p)14.2217.3520.4

To add some context, earnings estimates for this year have surged. One year ago, analysts thought Rolls-Royce would earn around 6p a share in 2024. But the estimate — yes, it’s still an estimate — has more than doubled during the period.

Forecasts have grown stronger because Rolls-Royce has just kept on beating forecasts. Looking forward, Rolls is trading at 22.9 times earnings for 2025, and 19.6 times earnings for 2026. These earnings are attractive when we compared to peers, including General Electric.

2024202520262027
Price-to-earnings36.528.3123.3720.94

While General Electric’s earnings are growing across the medium term, the stock still looks more expensive than Rolls at all given points.

Flying with tailwinds

First of all, we need to highlight that Rolls-Royce has a significant economic moat. In fact, I believe it has one of the best moats on the FTSE 100. The engineering giant operates in three industries that have extremely high barriers to entry: defence, civil aerospace, and power systems.

Predictably, the civil aviation and defence sectors are booming given the broader economic and geopolitical environment. However, the power systems sector is performing well too. Operating profit was £413m for the last year, a 44% year-on-year increase.

Perhaps the strongest tailwinds are coming from civil aerospace. The sector is expected to require more than 80,000 new engines over the next two decades. This is huge, but there’s a risk that Rolls’s 2011 tilt to the wide-body market may mean it misses out on 80% of expected orders.

Finding fair value

Rolls-Royce has a price-to-earnings-to-growth ratio of 0.67, and that suggests that it could be significantly undervalued. As fair value is demonstrated by a ratio of one, we could deduce that Rolls is undervalued by as much as a third. And this is broadly reinforced by discounted cash flow calculations, which highlight the stock could trade as much as 38% higher. That’s why I think it could be the best value stock on the FTSE 100.

Is this a top choice for growing wealth now?

Before deciding, we think this pick is another must-see.

Discover ‘One Top Growth Stock from The Motley Fool’ absolutely FREE.

Though past performance does not guarantee future results, over the past 5 years, it’s seen consistent double-digit revenue growth. ‘Return on capital’ - a key measure of business quality - is a colossal 57%. That’s almost 6 times higher than the UK average!

Best of all, it has a cult-like following. Customers who’re raving fans, potentially spending more money, more often - whatever the economy.

In our experience, discoveries like this are extremely rare.

So please, don’t leave without seeing, ‘One Top Growth Stock from The Motley Fool’, which includes both the Risks and opportunities.

Claim your FREE copy 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.

James Fox has positions in Rolls-Royce Plc. The Motley Fool UK has recommended 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

Investing Articles

4 REITs Fools own for passive income

REITs often have higher-than-average dividend yields compared to other stocks, making them a solid choice to consider for passive income…

Read more »

artificial intelligence investing algorithms
Investing Articles

Up 272% in just a year, is Palantir stock just getting started?

This writer recognises that Palantir has grown its business very well -- but does the stock price offer him an…

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

Up 50%? The Aston Martin share price forecast is mind-blowing! 

If analysts are right, the Aston Aston Martin share price could absolutely rocket in the year ahead. Harvey Jones says…

Read more »

Investing Articles

As the S&P 500 drops, here are 2 Stocks and Shares ISA holdings I’m watching

Our writer has different views on how President Trump's tariffs might affect these two US holdings in his Stocks and…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

£10,000 invested in Tesla stock at Christmas is now worth…

Tesla stock has been one of best-performing investments of the past decade. But things haven't gone to plan for investors…

Read more »

Investing Articles

Up 279% in 5 years, could Meta stock keep soaring?

Meta stock has more than tripled in five years. This writer sees lots to like about the business but also…

Read more »

Pink 3D image of the numbers '2025' growing in size
Investing Articles

25% total return in a year? Is now the perfect time to buy BP shares?

BP shares are on the front line of today's global economic and political uncertainty but analysts think they can still…

Read more »

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

With Cash ISA changes coming, could now be the time to consider buying shares?

Changes to the Cash ISA could lead to greater investment in the stock market. This could be a good thing…

Read more »