Image source: Rolls-Royce Holdings plc
Rolls-Royce (LSE:RR.) The shares are currently changing hands for more than three times what they were at the start of 2023. But despite this impressive performance, the share price is at the same level as five years ago.
Have I left it too late to get in on the action?
Nice
Regardless of the company involved, short-term investing, in my opinion, is never a good idea. In fact, holding stocks for a few days (or hours) is trading, rather than investing.
Stock prices can be very volatile over short periods.
Perhaps the most successful investor of all time, Warren Buffett, once said: “Our favorite holding period is forever.”
Marry
The arguments for keeping Rolls-Royce shares in my stocks and Shares ISA (and forgetting about them until I retire) are compelling.
However, at this time, I am not convinced that this is the correct course of action.
The company has certainly recovered well from the pandemic. It raised its earnings forecast twice in 2023, helping it become the FTSE 100The best interpreter.
Flying hours, the largest contributor to the group's revenue, are about 85% of what they were before Covid arrived.
Encouragingly, the company reported in August 2023 that its large engine order book had increased for the first time since 2018. Its civil aerospace business has now received future customer commitments equivalent to approximately eight years of revenue.
The company's Defense division is also achieving good results. The UK and US governments are big customers and have committed to spending more on security.
Across the business, it has embarked on a cost-cutting program aimed at saving £200m a year. And the directors plan to offload non-core assets.
All this means that the company is profitable again.
Additionally, net debt is falling.
Avoid
But despite these good reasons to invest, I think stocks are expensive.
The consensus analyst forecast is for earnings per share (EPS) to be 12.9 pence for the year ending December 31, 2024.
If correct, it means the stock is currently valued at 24 times earnings.
Looking ahead, earnings per share are expected to be 16.5p in 2025. This is a multiple of 18, which is still not cheap.
Of course, analysts can be wrong. But its forecasts would have to be wildly inaccurate for the company to have a price-to-earnings ratio close to that of the FTSE 100, around 11.
Quality companies rightly demand a premium – Rolls-Royce has a great brand and a strong reputation.
But I suspect that many of the expectations of improving profitability have already been factored into the share price.
Additionally, the company does not pay dividends.
Although it is expected to be restored soon, even the most optimistic are predicting a payout well below the FTSE 100 average.
That doesn't appeal to an income investor like me.
From best to worst, from richest to poorest
For these reasons, I'll keep the stock on my watch list.
And review the investment case in case there is a correction in the share price.
Before I commit to marriage, I want to make sure I have made the right decision. Otherwise, a painful (and expensive) divorce could be on the cards.
