The way forward for the Rolls-Royce share price

The Rolls-Royce share price has been falling in 2022. After this week’s AGM, here’s what I expect for the rest of the year, and beyond.

| More on:
Lady researching stocks

Image source: Getty Images.

The Rolls-Royce (LSE: RR) share price has gone from bad to worse in 2022. Since the turn of the year, Rolls has lost a third of its value. Still, we have seen a small uptick over the past couple of days, as CEO Warren East delivered an AGM trading update on 12 May.

As we can see from the chart, we’re still nowhere near any kind of sustainable share price recovery:

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

But a journey back to health has to start somewhere, and the latest update does sound reasonably encouraging.

Unchanged outlook

There weren’t any new numbers on the outlook front. Rolls just said performance this year has been in line with expectations, and that financial guidance for 2022 is unchanged.

Since FY results on 24 February, plenty has changed though. For one thing, that fateful day coincided with Russian tanks rolling into Ukraine. I’m thinking that development could be damaging for civil aviation, but provide a boost for defence business.

The guidance offered at FY results time was conservative anyway. Rolls’ main aim was to “generate modestly positive free cash flow in 2022, seasonally weighted towards the second half of the year“.

Positive cash flow is clearly good. But potentially having to wait until the second half to see it suggests no quick improvements. It does not surprise me then that the Rolls-Royce share price has remained weak so far in 2022.

The way forward

What is the way forward for Rolls-Royce? To me, it’s looking increasingly like it’s going to be slow and steady. Hopes of a quick recovery that sent the shares up and down several times since the depths of the pandemic were clearly based on unfounded optimism.

It’s Benjamin Graham’s voting machine/weighing machine thing again. In the short term, shares are moved by sentiment (the voting machine). But fundamental analysis (the weighing machine) comes to the fore in the long term.

Valuation

On the fundamental valuation front, I like to estimate an enterprise valuation (EV) for Rolls. The classic metric, the P/E ratio, can be misleading when a company carries a lot of debt. The EV version of the measure takes into account a company’s cash and debt situation too.

I’ve worked it out, using FY 2021 debt figures, but leaving off lease liabilities — I see those as more an operational thing than what we’d usually think of as debt.

Fair price?

On that basis, using forecast earnings, I put my EV estimate of the P/E at around 29. I don’t see that as especially cheap.

Analysts expect earnings to grow steadily over the next two years though. That would drop the EV P/E to 19 in 2023, and 13 by 2024. I’d rate the Rolls-Royce share price as probably around fair value right now. But I am cautious that forecasts at the moment are far from certain.

I do expect a long-term recovery for Rolls-Royce, and it might even be the FTSE 100‘s best growth share prospect right now. But in the short term, I see uncertainty and volatility.

So will I buy for my portfolio? I like buying good companies at fair prices, and I do think the Rolls price is fair now. But with all the uncertainty, I’m going to wait and watch a little longer.

Should you invest £1,000 in Rolls-Royce right now?

Before you consider Rolls-Royce, you’ll want to hear this.

Motley Fool UK's Director of Investing Mark Rogers has just revealed what he believes could be the 6 best shares for investors to buy right now… and Rolls-Royce wasn’t one of them.

The online investing service he’s run for nearly a decade, Motley Fool Share Advisor, has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 shares that are currently better buys.

All you need is an email address to get started

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

As the Footsie ticks downward, here’s what I’m doing!

The Footsie moved downwards on Thursday morning after the steepest rout for US stocks in almost two years on Wednesday.

Read more »

Passive income text with pin graph chart on business table
Investing Articles

3 ‘no-brainer’ passive income stocks to fight 9% inflation

With prices rising (and the value of cash savings eroding), Paul Summers picks out three stocks he'd buy for passive…

Read more »

macro shot of computer monitor with FTSE 100 stock market data in trading application
Investing Articles

5.2% dividend yields! Should I buy this cheap FTSE 100 share?

This FTSE 100 dividend share has risen in price recently. Yet at current levels it still looks extremely cheap on…

Read more »

Burst your bubble thumbtack and balloon background
Investing Articles

How high could the Woodbois share price go?

Jon Smith admits that there seems to be more room to run for the Woodbois share price, but explains why…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

2 penny stocks to buy and hold until 2032

I'm searching for the best penny stocks to buy and own for the next 10 years. I think the following…

Read more »

Smiling senior white man talking through telephone while using laptop at desk.
Investing Articles

Here’s how I’d spend £3,000 on UK dividend shares right now

There are many reasons to consider dividend shares today, including soaring inflation. Our writer explores two top picks that he’d…

Read more »

Social media and digital online concept, woman using smartphone
Investing Articles

Apple stock: Buffett is long, Burry is short. What should I do?

Our author thinks about whether following Warren Buffet into Apple stock might be a good addition to his portfolio –…

Read more »

Close-up of British bank notes
Investing Articles

5 ‘no-brainer’ dividend shares to buy today

Is there an easy way to narrow down the list of FTSE 100 dividend shares? I try one approach, with…

Read more »