3 reasons to buy Rolls-Royce shares, 1 reason to sell

Rolls-Royce (LSE: RR) shares have skyrocketed in 2023 as investors turn bullish on the long-term outlook for the engine maker. As I type, the stock price is up 53% this year.

Over a period of six months, the stock has more than doubled! That makes Rolls-Royce the best performing stock in the whole FTSE 100 over two timeframes.

However, at 149p today, it is still 49% of the 295p price it sold for five years ago.

So now is a good time for me to buy Rolls shares?

One big reason to buy

Civil aerospace is Rolls-Royce’s largest single division, accounting for nearly half of the group’s revenues. 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 for the company, because it needs a plane powered by engines in the sky. This is because they sell the machine, then earn recurring revenue by servicing it.

Management recently reported that large engine flying hours were up 65% from last year’s 2019 level. That is very encouraging. And with international travel in China rebounding, the company now expects that figure to reach 90% of pre-pandemic levels.

I wouldn’t be surprised to see a full recovery in engine flight hours by 2024.

Two other positives

Another reason for optimism is the appointment of new CEO Tufan Erginbilgic. ex BP executives have set about trying to make the engineering group a leaner and more profitable company.

Last week, the company shut down its artificial intelligence startup after failing to find a buyer. This R2 Factory business is only one year old. But I cannot be the last victim in Erginbilgic because he is focused on driving value in his core business segment.

Third, one of the geopolitical results of the tragic war in Ukraine is an increase in military spending by many countries. That means Rolls-Royce’s defense division, its second-biggest unit by sales, looks poised for long-term growth.

This arm a leading engine manufacturer for the military transport market and the second largest provider of defense aero-engine products and services worldwide. It has 16,000 machines in service in more than 100 countries, and an order backlog of £8.5bn at the end of last year.

And just last week, the company announced it would supply reactors for Australia’s nuclear-powered submarine fleet. It is part of a trilateral agreement signed between Australia, the UK, and the US.

No financial details have been announced, but it’s likely to be a sizable deal over the years.

One reason to sell

One potential reason I could sell, if I were a shareholder, is that the company’s net debt is still on the balance sheet.

However, at £3.3bn, that figure looks more manageable than the £5.2bn at the end of 2021. But it still needs to be reduced, and remains the main risk for me.

Overall though, I’m excited by the turnaround story unfolding in Britain’s flagship engine maker. I may add some shares to the ISA if I have more capital to invest in the next month.