Should I buy Rolls-Royce shares for 2023?

Rolls-Royce (LSE: RR.) Shares have been a popular investment this year. It seems that many investors believe the stock – which has fallen since the start of the Covid-19 pandemic – is undervalued.

Now, I don’t own any Rolls-Royce shares. Should I buy for 2023? Let’s talk about it.

Rising profits and earnings

Rolls-Royce has certainly had a tough time in recent years. With the airline industry paralyzed by the pandemic and subsequent disruptions, the profits and profits of aircraft engine manufacturers are on the rise.

City analysts expect revenues and profits to rebound. Now, they expect the group to generate profits of £11,656 million and £12,702 million for 2022 and 2023, up from £11,218 million in 2021. Earnings per share (EPS) are expected to come in at 110p this year and 362p next year.

One thing that could help Rolls-Royce here is the reopening of China. This could result in more aircraft in the air. An end to the Russia/Ukraine war could also add to it, although there is no guarantee that we will see this.

Factored into the stock price?

However, much of this recovery appears to have been baked into stock prices and valuations.

Currently, Rolls-Royce stock has a price-to-earnings (P/E) ratio of 84 using EPS forecast 2022 and 25 using EPS forecast 2023. This multiple is also above the median FTSE 100 P/E ratio of 13.3. So he didn’t think I was very nice.

Huge debt piles

Digging deeper, there are a few other things I like about Rolls-Royce stock. One of them is debt on the balance sheet. In its latest trading update, posted in early November, the company said it had £4bn of debt on its books. It is quite high and increases the risk for the case of investment.

A broker’s view

Another problem for me is that analysts are not very bullish here. Of the 18 brokers covering the stock, only three currently rate it as ‘buy’ or ‘strong buy’. Worryingly, four are considered ‘sold’.

Meanwhile, the broker’s stock price target is also slightly lower. Here are some of the latest targets:

• Barclays: 110 pp
• Berenberg: 100p
• Deutsche Bank: 90 p
• JP Morgan: 60 p

Certainly, Barclays’ price target suggests some good value from here. However, on the flip side, JP Morgan is showing significant downside from current levels.

Poor long-term track record

Finally, Rolls-Royce’s track record in terms of profitability is also somewhat concerning. Looking at the financials, the company posted net losses in 2016, 2018, and 2019 (all before Covid-19). This is not very encouraging. I prefer to invest in companies that are consistently profitable.

I’m moving now

Putting all this together, I will not be buying Rolls-Royce shares for my portfolio for 2023. In my mind, the risk/reward proposition is not very attractive.

Now, there are many other stocks that I see as better.