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:
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.
