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Rolls-Royce (LSE: RR.) The shares have had one of the best results in the London Stock Exchange. Over the last year, they have increased about 180%.
I missed out on these explosive share price gains because I don't own the shares. Is it too late to buy now? Let's discuss.
Business is thriving
To answer that question, I'll look at two factors: business performance and company valuation.
Now, there is no doubt that business performance has been brilliant. For 2023, Rolls-Royce published:
- Revenue of £15.4bn, up 21% year-on-year
- Underlying operating profit of £1.6bn, up 144%
- Record free cash flow of £1.3bn, up 155%
- A return on capital of 11.3%, more than double that of the previous year
- Net debt of £2bn, up from £3.3bn at end-2022
As a result of these figures and healthy guidance for 2024 (it expects an operating profit of between £1.7bn and £2bn and free cash flow of between £1.7bn and £1.9bn this year), brokers have been raising their earnings forecasts and stock price. goals. For example, Jefferies just raised its price target to 470p from 390p. This type of trading activity has boosted the stock.
Looking ahead, it is possible that Rolls-Royce can continue to perform well. This is because the airline industry is booming and major airlines are struggling to purchase new aircraft.
Last year, the company said it expects a 7% to 9% annual increase in the number of Rolls-Royce-powered aircraft in service for the rest of the decade. It also forecasts that engine flight hours will reach 120-130% compared to 2019 levels in the medium term.
Another key factor is that Rolls-Royce is raising maintenance prices for its engines. This should help increase revenue and profit margins.
However, I will point out that Rolls-Royce does have some competition in the aerospace engine space. These include GE Aerospace, CFM International (a joint venture between GE Aerospace and Safran Aircraft Engines), and Pratt & Whitney.
And there is a risk that customers will turn to these competitors for engines if Rolls-Royce raises its prices too much.
Recently, long-standing customer Thai Airways turned to GE Aerospace to provide engines for new boeing 787, following what sources have said were disagreements over pricing.
This is an issue to take into account.
High rating
Although the outlook looks promising, the company's valuation is quite high now.
Currently, brokers expect Rolls-Royce to generate earnings per share (EPS) of 14.9 pence by 2024 and 18.3 pence by 2025. These forecasts equate to P/E ratios of 28.1 and 22.9.
At those multiples, I think a lot of good news has already been priced into the stock. They don't leave a big margin of safety.
That said, multiples could decline if earnings forecasts continue to rise.
My opinion on Rolls-Royce
Adding all this together, I wouldn't be surprised to see Rolls-Royce stock rise further. The company is performing well and investors are excited about its prospects.
However, my gut feeling is that most of the gains from the civil aviation market recovery and the company's recent transformation are already embedded in the stock. As a result, I think there are better opportunities for my money right now.
