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rolls royce (LSE:RR) shares have soared in 2023 as investors turn bullish on the long-term prospects for the engine maker. As I write, the stock price is up 53% this year.
Within six months, stocks have more than doubled! That makes Rolls-Royce the best performing stock overall. FTSE 100 in both terms.
However, at 149 pence today, it is still 49% down from the 295 pence price it was trading at five years ago.
So is now a good time to buy Rolls stock?
A great reason to buy
The civil aerospace industry is Rolls-Royce’s largest single division, accounting for almost half of the group’s revenue. So the most obvious tailwind for stocks recently has been the reopening of China’s borders after three years of Covid restrictions.
This is very important to the company as it needs aircraft powered by its engines in the skies. This is because you sell these motors and then record recurring revenue by servicing them.
Management recently reported that large engine flight hours reached 65% of 2019 levels last year. That is very encouraging. And with the strong recovery in international travel in China, the company now expects that number to reach 90% of pre-pandemic levels.
I wouldn’t be surprised to see a full recovery in engine flight hours in 2024.
two more positives
Another reason to be optimistic is the appointment of the new CEO Tufan Erginbilgic. previous PA The executive has set out to make the engineering group a more efficient and profitable company.
Last week, the company shut down its artificial intelligence startup after failing to find a buyer for it. This R2 Factory company was only one year old. But I think it’s unlikely to be Erginbilgic’s latest victim as it focuses on driving value in its core business segments.
Third, one of the geopolitical results of the tragic war in Ukraine has been a massive increase in military spending by many nations. That means Rolls-Royce’s defense division, its second-biggest unit by sales, appears poised for long-term growth.
this arm is a leading manufacturer of engines for the military transportation market and the second largest provider of defense aero engine products and services globally. It has 16,000 engines in service in more than 100 countries and an order book of £8.5bn at the end of last year.
And just last week, the company announced that it will provide reactors for Australia’s fleet of nuclear-powered submarines. This is part of a trilateral agreement signed between Australia, the United Kingdom and the United States.
Financial details have not yet been announced, but it is likely to be a very important deal spanning many years.
a reason to sell
One possible reason you might sell, if you were a shareholder, is the net debt the company still has on its balance sheet.
However, at £3.3bn the amount looks more manageable than at £5.2bn at the end of 2021. But it will still need to be reduced and remains a key risk for me.
Overall, though, I’m excited about the turnaround story unfolding at Britain’s flagship engine maker. I may add some shares to my ISA once I have more capital to invest next month.
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