If I had £5k to invest today, would I buy Rolls-Royce shares?

Is it too late to buy Rolls-Royce shares? Roland Head takes a look at this high-flying FTSE 100 engineer and gives his verdict.

| 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.

If I’d invested £5k in Rolls-Royce (LSE: RR) shares in July 2022, I would have a holding worth just under £25k today.

Sadly, I didn’t buy in 2022. However, I could consider buying today. The stock market has no memory, after all. Rolls-Royce’s share price may continue to rise, if its performance is good enough.

City analysts certainly seem optimistic. Broker forecasts suggest Rolls’ annual profit will rise by 42% to £1.7bn over the next couple of years, as the company’s turnaround continues.

Are Rolls-Royce shares too expensive?

These growth forecasts look impressive to me. But this is one of the most closely covered companies on the UK stock market. The outlook for Rolls isn’t exactly a secret.

Given that stock markets always try to look forwards, I would argue that a lot of this forecast growth is already priced into Rolls-Royce shares.

This view seems to be supported by the stock’s valuation. Rolls shares currently trade on a 2024 forecast price-to-earnings (P/E) ratio of 30, falling to 24 in 2025.

That’s a fairly strong rating. It’s certainly well above average for the FTSE 100.

Strong trading

Strong market conditions often justify a premium rating. Rolls-Royce’s latest trading commentary suggests to me that the firm does have a good pipeline of work.

Large engine flying hours are expected to rise above 2019 levels in 2024, for the first time since the pandemic. This should drive an increase in maintenance activity, which is a key source of profit for the business.

New engine deliveries are on track to rise to 500-550 this year, from 458 in 2023. In addition to providing an immediate boost to sales, these extra engines will require regular maintenance.

What about the company’s competitors?

When I’m reviewing a company, I often find it useful to see how its competitors are performing – and how they’re valued.

In this case, French engine maker Safran trades on a 2024 forecast P/E of 29, falling to 24 in 2025. That’s very similar to the valuation of Rolls-Royce shares.

US giant RTX (which owns Pratt & Whitney) is trading on a 2024 forecast P/E of 19, falling to 17 in 2025. That’s a bit cheaper than Rolls or Safran.

However, RTX is a larger and more complex business, and profit growth is expected to be slower. So this might explain the more modest valuation.

Would I buy?

To sum up, I think Rolls-Royce is in good shape and has a strong outlook. I also think there’s a chance of further profit upgrades, if air travel remains strong.

Rolls-Royce’s defence business is another potential source of growth, and could receive a boost from increased government spending.

My only real concern is that all of this is already known.

Billionaire investor Warren Buffett once said: “You pay a very high price in the stock market for a cheery consensus”. I think that could be true here.

In my view, Rolls may need to deliver more positive surprises to justify further share price gains. I’m not sure how likely this is.

If I was investing £5k in a new stock today, I’d prefer a situation where there was more obvious value than I can see here.

For this reason, I’m not interested in buying the shares at the moment.

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.

Roland Head has no position in any of the shares mentioned. 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

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Google office headquarters
Investing Articles

1 reason I like buying S&P 500 shares – and 1 reason I don’t

Will this investor try to improve his potential returns by focusing more on S&P 500 shares instead of British ones?…

Read more »

Young woman holding up three fingers
Investing Articles

3 SIPP mistakes to avoid

Our writer explains a trio of potentially costly errors he tries to avoid making when investing his SIPP, on an…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Here’s how (and why) I’d start buying shares with £25 a week

Our writer uses his investment experience and current approach to explain how he would start buying shares on a limited…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s my 5-step approach to earning passive income of £500 a month

Christopher Ruane explains the handful of steps he uses to target hundreds of pounds in passive income each month.

Read more »

Investing Articles

2 UK shares I’ve been buying this week

From a value perspective, UK shares look attractive. But two in particular have been attracting Stephen Wright’s attention over the…

Read more »

Investing Articles

A lifelong second income for just £10 a week? Here’s how!

With a simple, structured approach to buying blue-chip dividend shares at attractive prices, our writer's building a second income for…

Read more »

Investing Articles

Here’s how I’d use a £20k Stocks and Shares ISA to help build generational wealth

Discover how our writer would aim to turn a £20k Stocks and Shares ISA into a sizeable nest egg by…

Read more »