Image source: Rolls-Royce plc
I often think of value stocks as companies with low earnings multiples and rock bottom share prices.
Therefore, Rolls-Royce Holdings (LSE: RR) may seem an unlikely value candidate, given the engine maker's explosive bullish move since October 2022.
However, stock market legend Warren Buffett and his billionaire investment partner Charlie Munger used to agree that value and growth go hand in hand. In other words, a company's growth is an important component of its value to an investor.
A growing business
So, although Rolls-Royce shares, around 297p, are not changing hands at a bargain valuation, there is plenty of growth potential in the business. That means investors willing to invest for the long term can likely realize value.
In November 2022, the company said it was targeting a turnaround in performance over the medium term. The directors have a “clear vision and strategy” aimed at creating a high-performance, competitive, resilient and growing business.
Better performance will drive a stronger balance sheet, directors said. Meanwhile, the new focused strategy has helped identify investment priorities and partnership opportunities. Part of the plan is to make non-core asset disposals worth between £1bn and £1.5bn over a five-year period.
CEO Tufan Erginbilgic said Rolls-Royce is in a “fundamental point” in its history. Meanwhile, City analysts have forecast a hefty 30% rise in profits by 2024.
It seems like the company is coming out of its stressful period during the pandemic in much better shape than when it entered it. The company had been struggling for some time before the coronavirus hit. By 2018, annual profits had turned into annual losses.
More agile and efficient
The pandemic and its confinements caused serious damage to the business. The company derives much of its revenue from maintenance agreements tied to aircraft flying hours. So the grounding of most of the world's commercial aircraft disrupted much of the company's revenue and cash flow.
For a time, the business was in serious trouble. It even seemed possible that it would fail completely. But a financial rescue package saved him. The business recovery has been spectacular since then, and the stock began to catch up in late 2022.
My impression is that the company's period on the precipice of oblivion has really served it well! It seems that a reborn, more agile and focused company has emerged, with decent growth prospects.
However, it is worth remembering that the company has also just demonstrated its vulnerability to geopolitical and macroeconomic events. Therefore, future growth is not guaranteed. It's even possible for shareholders to lose money on the stock.
However, I think the business also deserves further investigation and consideration at this time. It could be a useful addition to a diversified portfolio of stocks held for the long term.
We'll find out more about the company in its full-year results release scheduled for February 22. In the meantime, I keep an eye out for a timely entry point, such as dips and bear days in the market.
