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:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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

Close-up of a woman holding modern polymer ten, twenty and fifty pound notes.
Growth Shares

This FTSE 250 stock has beaten the index by around 10x over the last year

Jon Smith rates a FTSE 250 stock that has smashed the broader index performance and could keep going based on…

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

B&M shares are at record lows! Is now the time to consider buying?

The retailer, demoted from the FTSE 100 to the FTSE 250 last year, continues to struggle. But are B&M shares…

Read more »

Investing For Beginners

2 reasons why the stock market could hit 10,000 points by December

Jon Smith explains how the makeup of the UK stock market and the current valuation could support a move towards…

Read more »

Queen Street, one of Cardiff's main shopping streets, busy with Saturday shoppers.
Investing Articles

Why this FTSE 100 rocket is this investment trust’s number 1 holding

A UK investment trust is certainly going against the grain by having this FTSE 100 share as a high-conviction holding…

Read more »

UK financial background: share prices and stock graph overlaid on an image of the Union Jack
Investing Articles

These 2 FTSE growth stocks jumped 8% and 4.5% today!

Ben McPoland takes a closer look at a pair of FTSE stocks that are performing really well recently. Why are…

Read more »

Road 2025 to 2032 new year direction concept
Investing Articles

This under‑the‑radar FTSE 100 growth stock is also a secret dividend superstar!

Harvey Jones belatedly wakes up to a brilliant FTSE 100 growth stock that has an equally remarkable track record of…

Read more »

Business manager working at a pub doing the accountancy and some paperwork using a laptop computer
Investing Articles

Barratt Redrow share price plunges 9% on profits hit – time to consider buying?

Harvey Jones says FTSE 100 housebuilders continue to suffer with the Barratt Redrow share price slumping on a profit warning.…

Read more »

UK financial background: share prices and stock graph overlaid on an image of the Union Jack
Growth Shares

Why the next month could make or break the Lloyds share price

Jon Smith outlines two key events in coming weeks that could influence the Lloyds share price, leading him to make…

Read more »