Image source: Rolls-Royce plc
He Rolls-Royce (LSE:RR.) The share price seems to be the gift that keeps on giving. What is it about the popular jet engine maker that has everyone and their uncle jumping into the stock?
Although many important FTSE 100 Although the stock suffered losses throughout January, Rolls-Royce continued to fly even. I admit that the spectacular upward trajectory of 2023 has stabilized a bit, but Rolls-Royce doesn't seem ready to land yet.
Up 4% this month and trading at £3.11 per share, I'm looking for signs of when the price might drop. However, most analysts seem intent on predicting further gains for the stock.
Why are they so confident when Rolls-Royce's balance sheet doesn't look so attractive?
Taking a look under the hood
Rolls-Royce's profits have been growing at an average annual rate of 20%, in an industry with an average of just 12%. However, despite this, the company is not exactly living up to the role.
One of the key issues affecting Rolls-Royce's balance sheet is negative shareholders' equity. With liabilities totaling £34.7bn and assets of just £29.7bn, that's a deficit of £5bn, leaving it with a debt-to-equity ratio of -83.2%.
But that certainly hasn't affected trust within the company's walls. Roll-Royce insiders have bought almost £164,000 worth of shares in the last three months, mostly from newly appointed chief executive Tufan Erginbilgiç.
I guess a £25.4bn company is too big to fail, right?
What analysts say about the Rolls-Royce share price
When I consider the impressive balance of BAE SystemsI wonder why Rolls-Royce has eclipsed this competitor by such a margin.
At £5.12bn, BAE has more debt than Rolls-Royce, but it is very well covered by short-term assets and operating cash flow.
BAE shareholders should have nothing to worry about.
However, Rolls-Royce's share price has risen four times as much as BAE's in the last year. Furthermore, BAE shares are considered to be trading at fair value, while Rolls-Royce is estimated to be undervalued by a whopping 59.5%.
Analysts scoff at the meager share price of £3.11, feeling £7.50 would be more accurate.
Overall, Rolls-Royce shares remain a strong buy by most analysts, generating forecasts for gains of between 14% and 25% over the next 12 months.
I think?
Like BAE, Rolls-Royce has likely benefited from an increase in government defense spending as tensions rise in Ukraine and the Middle East. Add to this a recent change in strategy and increased demand for air travel, and it appears that Rolls-Royce has developed a winning formula for success.
However, I don't see much potential for further growth here. The stock price appears to be trading right on the edge of a trend line that goes back 10 years. If there is a ceiling, I think Rolls-Royce might have reached it.
I wouldn't jump into a short position just yet (as German broker Berenberg recently did), but I will hold the position for now and watch the potential of smaller defensive stocks like QinetiQ.
