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Since the end of September, Rolls-Royce holdings (LSE: RR.) Stocks have been on the up. The stock price has skyrocketed more than 70% from its 2022 low. But after such a strong rise, is the stock now overvalued?
Rolls-Royce shares plummet
When I weigh stock valuations, I always check stock prices to see their history. After all, as a leading London merchant once told me, “The only action is price action.” In other words, the price you pay for an asset is the most important when buying.
For Rolls-Royce stock, its price action over the last five years has been really tough. For example, on August 3, 2018, 20 months before the coronavirus crashed the stock markets, this popular stock closed above 375 pence. Since then the price has plummeted dramatically, falling to levels not seen since the depths of the 2000/03 market crash.
Here’s how Rolls-Royce’s share price has performed over various time periods, based on Friday’s close of 110.2 pence:
| One day | -2.9% |
| 2023 to date | +17.4% |
| One month | +18.1% |
| Six months | +26.5% |
| One year | -4.6% |
| Five years | -63.2% |
Shares rose by more than a sixth in 2023, taking the famed engineering group’s market value to £9.2bn. Yet while the stock price has risen by more than a quarter in six months, it has lost nearly 5% over the past year. Worse, it’s down almost two-thirds in five years.
Too far, too fast?
At its lowest point in 52 weeks on September 28, the Rolls-Royce share price collapsed to a daily low of 64.44 pence. With the price now at 110.2p, the shares have shot up by more than seven tenths (71%) from the bottom.
It’s a fantastic comeback. In fact, I realize I didn’t buy this stock when I saw it crash below 70 pence. But have stocks gone too high, too fast? Have things improved enough for Rolls-Royce in four months to justify such a big jump in valuation?
Standing on a burning platform
For one, things are looking up for the engineer. For example, long-haul bookings are booming again, which will help boost revenue per engine mile for his civil aerospace division. Also, passenger numbers are headed toward pre-pandemic levels, which is good news for a group that earns a large share of revenue from civil aviation.
The war in Ukraine has given a boost to the defense division of the firm, with income that exceeds three tenths (31%) of the total. In addition, the power systems division is also winning new contracts in the UK and Europe.
However, the group is heavily debt-burdened: net debt was £5.1bn as of mid-2022. And on Thursday, Rolls-Royce’s new CEO warned employees that the company was a “burning platform” and his performance was “untenable“. Oh!
I won’t buy Rolls-Royce stock right now
Then the new CEO talked about restructuring, radical transformation, efficiency and optimization, keywords for more job cuts, I think. Frankly, this grim and brutal outlook could hardly have motivated workers to listen in Derby and elsewhere.
In short, Rolls-Royce faces strong headwinds on the long road to recovery. And with their shares up more than 70% from their low, they seem overpriced to me. So I’ll pass at this price, at least for now!
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