The Rolls-Royce (LSE:RR.) share price feels like the ‘Talk of the Town’ these days. In the last year alone, the shares have soared a whopping 147%. This company’s been on my watchlist for a long time, but I keep on waiting for the right moment to pull the trigger.
So is there a buying opportunity on the horizon, or is this one just going to keep climbing higher?
An incredible recovery
The company’s turnaround story’s been nothing short of remarkable. Many investors will remember it facing severe challenges during the pandemic due to its reliance on the aviation sector. However, since then, management’s staged a dramatic recovery under CEO Tufan Erginbilgiç’s leadership.
Cost-cutting measures, strategic refocusing, and a rebound in air travel have all contributed to the company’s improved fortunes. In the last month alone, the shares are up 11%.
As an interested investor, I keep asking myself if this is the end of the recovery, or just getting started? Clearly, there’s a tremendous demand for the company’s products across, aviation, defence, and beyond.
Recent excitement’s been driven by the potential revenues in clean energy. Analysts point to the enormous opportunities for increased energy resilience through small modular reactors (SMRs) and sustainable aviation fuel. However, after a sustained rally, there’s a risk that investors take profits and move on at the first sign of trouble.
The numbers
To me, the answer to whether I’ve missed the boat sits in the numbers. With analysts looking far into the future for potential areas of growth, and mapping out risks, there are plenty of opinions out there. I try to focus on metrics like discounted cash flow (DCF) calculations. This estimate suggests there’s still a healthy 57% more growth before the determination of fair value’s reached.
Obviously, this sounds great. However, with annual earnings expected to decline by 1.6% for the next five years, growth may be flattening out. If investors have enjoyed healthy returns of late, a sudden change in trend might send a few packing.
Let’s take a look at the competition. Both BAE Systems and Babcock International have more appealing earnings growth (7.4% and 15.2%). At a P/E of 18 times (compared to 22 times and 16 times), the Rolls-Royce share price isn’t exactly expensive, but there could be better opportunities.
In the past, my key concern was the enormous £5.7bn debt on the balance sheet. However, recent earnings reports show the company’s substantially increasing earnings guidance for the coming year. I suspect the debt load will be heavily reduced by this time next year.
I’ll keep waiting
So while the easy money may have already been made, there could still be a good amount of potential for long-term investors. Ultimately, whether I’ve missed my chance with Rolls-Royce depends on the investment horizon I’m willing to commit to, and the success of the company’s long-term strategy.
I still see a lot of value in the company’s strategic positioning and growth potential. Although there may be plenty of opportunities out there, I’ll be keeping this one on my watchlist, and waiting for the right moment to buy.
