Rolls-Royce’s share price is flying! Should I invest in the FTSE 100 share today?

At Rolls-Royce (LSE:RR) share price rose sharply at the start of 2023. In fact, it led FTSE 100 higher in Friday trade and ended 3.8% higher on the day.

At 108p, Rolls shares are now up 14% in year-to-date trading. Can the tech giant continue its recovery? And should a long-term investor like me buy a business for an investment portfolio?

The case for

The bright outlook for the civil and defense aviation market provides a good reason to buy Rolls-Royce shares today. Collectively, these industries account for about three-quarters of the group’s revenues.

The number of commercial passengers from emerging markets will increase over the next decade. As a result, the number of aircraft in the air should grow significantly, as shown in the chart from the Oliver Wyman consultancy below.

Rolls can also expect engine demand to grow as military budgets rise.

Tensions in the West over Chinese and Russian expansionism have led to global arms spending exceeding $2trn for the first time in 2021. Governments around the world have pledged to increase arms spending further following Russia’s invasion of Ukraine as well.

Having exposure to a large market does not alone make a stock worth investing in.

The beauty of Rolls-Royce is a formidable barrier to entry. It has decades of experience building aircraft engines and servicing them, serving as a hardware supplier to aircraft manufacturers and the military. It also operates in a highly capital-intensive industry. New competitors won’t appear overnight to steal customers.

Case against

After all that, I still have big reservations about buying Rolls-Royce shares. My main concern is the huge financial liabilities (undrawn net debt of £4bn in September).

The cost of this service is huge and will rise again as interest rates rise. This huge debt also casts a shadow over corporate R&D spending in areas like green technology. And they’re especially worried about me because of the uncertain short-term outlook for the airline industry.

Airline profits have rebounded after the end of the Covid-19 lockdown. But they can lose a lot because the global economy splutters. Travel spending from tourists and business passengers is likely to hit a buffer in 2023, hurting Rolls’ profits from the ministry’s activities and reducing its ability to service its debt.

Verdict

As a value investor, I think Rolls-Royce shares are looking very good right now. City analysts estimate that the engine builder will return 292% in 2023. This results in a price-to-earnings (PEG) growth ratio below rock-bottom forward 0.1. Any reading below 1 indicates that the stock is undervalued.

However, there are plenty of other FTSE 100 value stocks I could choose from right now. And I was put off by Rolls’ high level of debt as well as the prospect of strong and sustained cost inflation. High costs forced a loss of £1.6bn in the first half of 2022.

All things considered I’d rather invest in other UK stocks that are cheap right now.