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At Rolls-Royce (LSE: RR.) share price has enjoyed a regular recovery in recent months. At FTSE 100 machinists have risen a staggering 59% from the October low. And got 2023 to be a flyer too, back above 100p per share for the first time since last spring.
I have so far resisted buying Rolls-Royce shares for my portfolio. Am I leaving too late? Indefinite.
A reason to be cheerful
I believe there are some good reasons to expect Rolls-Royce shares to continue to march north. First among them is the bright outlook for the travel market.
High inflation around the globe is putting enormous pressure on consumer and business spending. But demand for air tickets remains solid, reflecting a strong desire to travel after the Covid-19 lockdown.
The airline recovery may continue as inflationary pressures continue to ease. this week, United Airlines – the third largest airline in the world by revenue – said it expects profits to quadruple in 2023 as predicted strong passenger numbers.
A strong civil aerospace market is not the only reason to be positive about Rolls shares. Trade in the Power Systems engine division is also white hot and record levels of order intake in the first 10 months of 2022.
The company’s Defense arm was also strong and won $1.8bn in contracts between January and October.
Still pretty cheap
Some stock investors may argue that the good news is overshadowed by Rolls-Royce’s rising share price. But others would argue that the company’s valuation remains too low given the bright conditions of the industry.
City brokers think the FTSE company’s earnings will grow by 350% annually by 2023. It trades on a price-to-earnings growth (PEG) ratio of 0.1. Any reading below 1 indicates that the stock is undervalued.
Divided opinion
Reading this rock bottom can give you scope for new stock price gains. But number crunchers are divided on whether Rolls is a good investment at current prices.
Out of 16 analysts with ratings on Rolls-Royce stock, four have rated the company a ‘buy’ while five have assigned a ‘sell’ rating. Seven others have taken a neutral stance on the engine builder, according to stock screener Digital Look.
So where do I stand?
As I said, I have refrained from buying these FTSE 100 stocks until now. And I’m happy to continue investing in other UK stocks today.
Well, the profit outlook at Rolls-Royce is very encouraging. But that may not translate into blockbuster profits amid supply chain problems and high cost inflation.
The problem has led to a loss of £1.6bn in the first half of 2022. It could become a problem as the Ukraine war continues and China’s Covid-19 crisis persists.
I also avoid Rolls-Royce shares because of their high debt levels. This raises doubts about how many businesses will be able to invest in their growth projects. It can also affect when the company will return the dividend and the size of the final payment.
All things considered, I would prefer to buy more cheap FTSE 100 stocks for my investment portfolio.
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