Up 180% in a year! Is the fastest-growing FTSE 100 share still a bargain?

Rolls-Royce is the top-performing FTSE 100s stock of 2024 so far, almost tripling in the last 12 months. But is it too late for me to buy this engineering giant?

| More on:
Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.

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.

Looking across the FTSE 100, the Rolls-Royce (LSE:RR.) share price has been putting many of its peers to shame. The engineering giant has seen its valuation skyrocket over the last 12 months, with the group’s market cap expanding by roughly 180%!

That makes it the top-performing company in the UK’s flagship index, firmly ahead of NatWest Group, which is up 105%. But after enjoying an enormous surge, the question on investor’s minds is whether it’s too late to hop aboard the gravy train? Let’s take a look.

A stellar comeback story

The travel restrictions during the pandemic were a massive blow to Rolls-Royce’s primary source of revenue – aeroplane engine maintenance. And at one point, the situation got so bad that it seemed like Rolls-Royce was heading straight for bankruptcy.

However, while Covid-19 was undeniably catastrophic, problems at Rolls-Royce had been brewing for years earlier. Mismanagement of capital allocation and excessive borrowing put the firm’s balance sheet in a less-than-ideal state which is what ultimately crippled the business when interest rates started to rise.

It wasn’t until new leadership came in and introduced some radical overhauls that things at Rolls-Royce started to improve. This included massive companywide layoffs and non-core business disposals to desperately raise capital to get its overleveraged balance sheet under control.

The plan seems to have worked. It has been transformed into a cash-generating machine with impressive free cash flow margins and a return to operating profitability for the first time in years. With that in mind, it’s not surprising to see this FTSE 100 business valuation take off. Even more so now that dividends have also been restored after a five-year holiday.

Time to buy?

Seeing Rolls-Royce guide for £2.1bn-£2.2bn of free cash flow generation in 2024 is undeniably exciting. That provides a lot of financial flexibility to help pay down debts and keep its pension obligation in surplus. However, with £5.2bn of outstanding loan obligations, it may be a few years before management will be able to allocate large chunks of this newfound wealth into new projects.

In the meantime, there’s a rising concern relating to growth. A large driver of the firm’s surge in cash flow stems from the rebound in the long-haul travel market. But now that international travel has been restored to pre-pandemic levels, the recovery tailwinds have stopped blowing, which is expected to cause growth to slow down subsequently.

Rolls-Royce is certainly not a one-trick pony. And with solid revenue growth from its Defence and Power Systems segments looking on track to continue, this may prove sufficient to offset the slowdown in its Civil Aerospace arm. But it’s unclear to what degree as we move into 2025 and beyond.

At a price-to-earnings ratio of 20.3, it seems that investor expectations are a bit lofty at the moment. That’s why I believe the opportunity to capitalise on Rolls-Royce’s rebound has likely passed. And at today’s price, this isn’t a business I’m tempted to add to my portfolio.

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.

Zaven Boyrazian 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

Happy parents playing with little kids riding in box
Investing Articles

2 FTSE 250 dividend growth stocks I’m considering for passive income

Paul Summers thinks the best dividend stocks to buy are those that consistently return more money to investors every year.

Read more »

Investing Articles

The Compass Group share price looks ready for growth after positive 2024 results

The Compass Group share price is up 4% today following positive full-year results. Our writer considers its prospects in 2025…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

How I plan to build an £86k yearly second income in the stock market

Is it realistic to aim for a substantial future second income by investing in high-quality shares? This writer firmly believes…

Read more »

Investing Articles

Here’s the Vodafone share price forecast up to 2027

Can anything stop the Vodafone share price slide? It's still early days for the company's turnaround plan, so we might…

Read more »

Investing Articles

Down 37%, here’s one of my favourite FTSE 100 bargain shares to consider

This FTSE 100 retailer's shares have collapsed in 2024. Despite tough trading conditions, is now the time to consider buying…

Read more »

Investing Articles

Which do I like best today, Nvidia or Tesla stock?

EV maker Tesla stock is on the up, while Nvidia growth is softening a bit. But they're both in the…

Read more »

Investing Articles

After jumping 15%, my favourite FTSE 250 stock looks set for the premier league

Games Workshop stock recently reached an all-time high, placing it within touching distance of promotion from the FTSE 250.

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

1 top growth stock on my Christmas buy list!

Ben McPoland reveals one top-notch growth stock down 29% that he plans to stuff into his portfolio in time for…

Read more »