Image source: Rolls-Royce Holdings plc
From near extinction to record levels, Rolls-Royce (LSE: RR) shares have staged a truly epic comeback.
A little less than four years ago, the FTSE 100 The shares were trading for just 39p. Today, it's changing hands at 470p. That translates to a staggering 1,103% increase!
This means Rolls-Royce has 10 or more pockets for those smart enough to have invested near the pandemic minimum.
Unfortunately, it was only later that I realized the enormous potential for change. After some hesitation I finally hit the buy button at 149p.
I really want to increase my holding, but the share price rarely stops to breathe. Is now the right time to buy?
Another optimistic update
In May, the engine maker delivered a positive trading update ahead of its half-year results on August 1.
CEO Tufan Erginbilgiç said: “We are driving growth, delivering contractual enhancements and improved margins, unlocking efficiencies and creating value across the group. We've had a good start to the year…(which) provides greater confidence in our 2024 guidance.”
In the four months to April 30, large engine flight hours returned to 100% of pre-pandemic levels and could increase by another 10% throughout the year. This is due to the continued recovery of international air traffic in Asia.
Meanwhile, the company's fleet continues to grow, with a recent substantial order for 60 Trent XWB engines from IndiGo. This was its first deal with India's largest airline, which retains 60% of the domestic passenger market despite having a fifth of its fleet grounded due to engine failures made by rival Pratt & Whitney. American Rolls-Royce.
India could be a high growth market in the future.
keep going
The company's defense business is also growing as countries strengthen their militaries. Australia has confirmed spending for the AUKUS submarine programme, which includes Rolls-Royce reactors. AUKUS is a trilateral defense pact for the Indo-Pacific region between Australia, the United Kingdom and the United States (hence the name).
The company also highlighted recent improvements from the three major credit rating agencies. And it has reduced its gross debt position by paying a €550 million bond with the underlying cash.
An ever-present risk here is a major engine recall, as has happened with RTX-property of Pratt & Whitney. In September, RTX said it expects this engine issue to cost up to $7 billion. This includes compensating customers for lost capacity.
What about the valuation?
The stock currently trades at 31 times forward earnings. That's more than BAE Systems (20.4) and RTX (19.7).
On the other hand, Rolls-Royce is expected to grow rapidly. By 2027, it aims to achieve an underlying operating profit of between £2.5bn and £2.8bn, an operating margin of 13%-15% and free cash flow of £2.8bn-3.1bn. He is on his way to achieving it.
In 2027, the company is expected to post earnings per share of 23 pence. If so, the future earnings multiple will be approximately 20x by 2027.
Therefore, the stock may be overvalued in the short term but have decent value in the long term, if these forecasts prove correct.
For me, I'm still optimistic here. As global airlines grow their fleets and fly more aircraft, Rolls-Royce should generate steady revenue streams for decades.
If the August semi-annual update is positive, you may buy more shares.
