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The continued rise of Rolls-Royce (LSE:RR.) The share price was arguably the biggest investment story on the market. FTSE 100 during 2023.
The engineering giant started the year at 94.76 pence per share and ended it at 297.8 pence. This is a staggering 214% year-on-year increase.
Rolls-Royce's highest-ever share price of around 442p was printed almost exactly 10 years ago. If the company can replicate 2023's performance, it would break that record and end the year at 948p.
This seems like a difficult task! But even a more modest 47% increase would take the company above that high set in early 2014.
Can Rolls do it? And should I buy the FTSE company for my UK share portfolio today?
Strong travel sector
A strong rebound in the airline sector has underpinned the rise in the Rolls share price since the dark days of the pandemic. This should come as no surprise, given the importance of its aircraft servicing operation to the group's profits.
Just over 60% of the company's underlying operating profit came from its Civil Aerospace division in the first half of 2023.
It is encouraging that the recovery of the global aviation sector is also continuing. The International Air Transport Association (IATA), for example, has forecast that the total number of air passengers will reach 4.7 billion in 2024. This would surpass the record of 4.5 billion people who flew in 2019.
There is a chance that ridership may even exceed this forecast if, as many expect, major central banks such as the US Federal Reserve begin to reduce interest rates.
Transformation measures
However, strong market conditions don't tell the whole story for this recovering stock. Investors were also impressed by the initial success of the company's multi-year transformation program.
Measures such as large-scale cost reduction and business optimization helped underlying operating profit soar to £673m between January and June 2023. This is up from £125m in the year former.
CEO Tufan Erginbilgiç is not taking his foot off the accelerator either. In October, he announced plans for further job reductions of between 2,000 and 2,500. A month later he also said a further £1.5bn worth of assets could be sold. News of additional self-help measures would likely boost investor confidence further.
Should you buy Rolls shares?
But while Rolls could continue to rise in 2024, I'm not convinced to buy shares for my portfolio.
The company's rising share price leaves it trading at a significant premium. Today, it trades on a forward price-to-earnings (P/E) ratio of 24.1 times, more than double the FTSE 100 average of 11 times.
This reflects market expectations that the company's business news will continue to be impressive. The danger for investors is that anything else could send the stock tumbling from current levels.
A sudden downturn in the travel industry is one reason why the business could struggle. Tough conditions for the global economy could also create new problems for its Energy Systems unit. Finally, there are long-standing supply chain issues and inflationary pressures across the aerospace sector.
I'm also concerned about the high levels of debt Rolls still has on its balance sheet and what this could mean for future dividends. The market now expects shareholder payouts to return this year, so signs to the contrary could send investors heading for the exits.
Unfortunately, Rolls-Royce carries too many risks for my liking. So I prefer to look for other FTSE 100 stocks to buy.
