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It can be a little frustrating when a stock I’ve been watching goes up a lot in a short space of time. That’s basically what happened with rolls royce (LSE:RR) shares.
I have seen them more than double in the last 26 weeks while sitting on my hands. When I was less gray than today, I could have bought the stock on the up for fear of missing out (FOMO).
But over time I learned to stop doing that, since Mr. Mercado has a bad habit of offering me a share for less than what I had already paid for. Sometimes patience really can be a virtue.
Anyway, I see that the Rolls-Royce share price has stabilized in the last month. So now is a good time to invest?
The change continues
At the end of February, the engine manufacturer reported its annual results for 2022. And there was plenty of reason for optimism.
Its revenue rose to £13.5bn, up from £11.2bn in 2021. Meanwhile, it posted £652m in underlying profit, £238m up on the previous year.
Importantly, a recovery in engine flight hours helped boost its free cash flow to £505m. That was a massive £2bn increase in 2021. While this is still not enough to put a dent in its £3.3bn net debt, which remains a concern, it is a very encouraging sign.
Its civil aerospace division remains the largest. Therefore, restarting travel in and out of China is a big problem for the company. Its engines power 60% of China’s wide-body aircraft and 90% of the country’s Airbus A330 fleet.
Today, the middle class in China numbers more than 400 million people. And the country is expected to overtake the US as the world’s largest passenger aviation market by 2030. Long-term demand for the company’s engines is therefore likely to increase substantially.
optionality
One of the things that I value in a business is optionality. That is, the ability of a company to identify and capitalize on new growth areas. This gives you multiple ways to grow and, I think, a greater chance of long-term success.
For me, Rolls-Royce has plenty of options.
Its Power Systems segment continues to grow. And his Defense division has just announced an agreement to provide reactors for Australia’s new fleet of nuclear-powered (though not nuclear-armed) submarines. This is part of a massive defense deal between Australia, the UK and the US.
In addition, the company has just secured funding to build a small nuclear reactor for a planned permanent human base on the Moon.
I think the company has many ways to win.
Will I buy the shares?
I have become more and more optimistic about Rolls. In fact, I think we could be on the verge of a massive multi-year swing in stock price.
Of course, that’s assuming the company continues to make progress, particularly in reducing its debt. But I don’t see any reason why it shouldn’t, given the reopening of China’s borders and a renewed focus on operational efficiency.
What’s more, the stock is still 62% lower than it was a decade ago, despite its recent rise.
I’ve seen enough progress to justify moving the stock from my watch list to my buy list.
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