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The past six months have been pretty good for shareholders in the leading British engineering company Rolls-Royce Holdings (LSE: RR). The stock has risen since its September 2022 low.
After showing the highest power since the fall, is Mr. Market taken away? More precisely, have Rolls-Royce shares gone too far ahead of the company’s prospects?
Rolls-Royce stock rises
As I write, the Rolls-Royce share is trading at 151.7p. This values the Derby aerospace and defense company at £12.7bn, making it a FTSE 100 steady
However, back in September, this stock looked sick. On 28 September 2022, the 52-week low was 64.44p. That proved to be a turning point for this widely held and traded stock.
On March 9, Rolls-Royce shares were taken to a 52-week high of 160p. It returned 148.3% which is the lowest in five months.
Even after falling back to current levels, the stock has gained 135.4% since its September low. Here’s how the stock has fared over the past seven periods:
| current price | 151.7 p |
| One day | +1.8% |
| Five days | +4.6% |
| One month | +1.4% |
| Year to date | +62.8% |
| six months | +117.4% |
| A year | +51.2% |
| five years | -49.1% |
Over six periods ranging from one day to one year, Rolls-Royce shares have had positive returns. The momentum is great for shareholders, as the stock has nearly halved in five years.
By the way, this makes Rolls-Royce shares the FTSE 100’s best performer in 2023, by a wide margin.
Rolls-Royce is big business
I’m a big fan of Rolls-Royce as a business. Indeed, several members of my family in Derby have worked for this famous company. But three things are worrying about this stock today.
First, the stock trades with a very high price-to-earnings ratio of 76.4, which means it has a profit yield of just 1.3%. This makes this stock among the most expensive on the Footsie.
Second, as a value/income investor, I prefer dividend paying stocks. To conserve cash, Rolls-Royce canceled cash payments during the ‘pandemic panic’ of 2020. Given the need to boost cash flow, I suspect bringing back dividends is the last thing on the board’s mind.
Third, due to the collapse of air travel in 2020/21, this group’s balance sheet includes a net debt of £3.3bn. Then again, this has shrunk from £5.2bn at the end of 2021, due to disposals and higher cash flows.
Should I buy Rolls-Royce stock today?
Now for some positive points. After flying airmiles increased significantly in 2022, analysts expect this promising trend to continue in 2023/24. As profits from the company’s jet engines are tied to miles flown, this will provide a huge boost to Rolls-Royce’s earnings in the future.
Additionally, increased defense spending following Russia’s invasion of Ukraine should boost growth in Rolls-Royce’s defense arm. And with 50,000 employees, 2022 revenue of £13.5bn, and a pedigree stretching back to 1904, this group is one of the great British businesses.
That said, I will give you the opportunity to buy Rolls-Royce shares now. As an old-school value investor, they seem a bit too highly priced for me today!
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