The last time I covered Rolls-Royce (LSE:RR) shares was in mid-January when its shares were trading for exactly £3.
Back then I was discussing whether its shares could hit £4.50 by the end of 2024. I concluded by saying that this was a bit too optimistic.
However, just under two and a half months since then, its shares have continued their upward trajectory, rising by 42.3% to hit £4.22.
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A six-month return of 92.1% makes it one of the best investments over that period.
Why have Rolls-Royce shares been so successful?
Looking at its annual report, we can begin to understand this rise.
In terms of the income statement, revenue rose from £12.7bn in 2022 to £15.4bn in 2023. Even more impressive was profit before tax, which increased six-fold, from £206m to almost £1.3bn.
The balance sheet also displayed a splendid improvement. Free cash flow more than doubled, from £505m to almost £1.3bn. Whereas, net debt fell from £3.3bn to under £2bn.
These are very good results that help explain the parabolic rise.
The one negative, however, is the company’s dependency on the wider economy. It has recovered well from the pandemic, but a similar economic shock could be harmful to the firm. This is especially true for its civil aviation engine sales, its largest revenue source. Demand for this is largely out of Rolls-Royce’s control.
This stock has been quietly emulating Rolls-Royce
When I think of Rolls-Royce, I’m reminded of Trainline (LSE:TRN).
Shares of the digital rail and coach technology company have also been on a tear over the past six months, growing by 41.2%.
However, the FTSE 250 company has received nowhere near the same amount of attention.
As with Rolls-Royce, I have concerns about its dependence on the wider economy. It too has recovered strongly from the pandemic.
But another economic shock could spell trouble for the firm. Moreover, its dependence on railway companies and carrier competition is also something to ponder.
Nevertheless, I think there are plenty of reasons to be enthusiastic about the company.
Trainline grew net ticket sales by 22% in 2023, from £4.3bn to £5.3bn. This translated to revenue growth of 21%, from £327m to £397m.
The company also has huge international potential. For example, combined net ticket sales in Italy and Spain were up by 43%.
Considering its net ticket sales in Europe are still only £1bn compared to the £3.5bn in the UK, there is a great growth opportunity for it to take in the larger European market.
Now what?
The hype around Rolls-Royce has fuelled its shares seemingly endlessly upwards. It’s a great company, however, I believe most of the good news is already priced into its shares at this point.
Trainline has meanwhile delivered returns most investors would be incredibly happy with. But it’s not at the same rate as Rolls-Royce.
This is surprising to me as both are growing at similar levels. Trainline is also Europe’s most downloaded rail app and is in a prime position to take advantage of the shift to paperless train tickets.
I believe its shares still have more room to run, with the potential to deliver Rolls-Royce-level returns on top of the impressive returns it has already delivered. Therefore, if I had the spare cash, I’d buy some of its shares today.
