Rolls-Royce (LSE: RR) shares continue to be very popular among the UK retail investor community. Last week, the firm was the second most bought stock on Hargreaves Lansdown’s investment platform. The week before, it was the most purchased.
Should I follow the crowd and buy Rolls-Royce shares for my own investment portfolio? Or should I go against the herd and give the stock a miss. Let’s take a look.
Why UK investors are buying Rolls-Royce shares
I can see why Rolls-Royce shares are popular right now. For starters, the share price has experienced a massive fall in recent years. This time three years ago, the stock was trading near 280p. Today, however, it’s under 80p. Large share price falls like this often attract retail investors looking to buy low and sell high later on.
Secondly, the outlook for the company should improve in the years ahead. Rolls-Royce generates the bulk of its revenues from the servicing of commercial jet engines. So, the company has been impacted quite badly by the coronavirus pandemic. However, the travel industry is now in recovery mode and the number of flights is picking up. As the industry continues to return to normal in the years ahead, Rolls-Royce’s revenues and profits should get a boost.
It’s worth noting here that City analysts currently expect the group to generate revenues of £12.7bn for 2023, up from £11.6bn this year. They expect net profit to rise to £340m in 2023 from £92m in 2022.
Should I buy Rolls-Royce stock?
Digging a little deeper into the numbers, though, I’m not convinced that the stock is actually cheap right now.
At present, City analysts expect Rolls-Royce to generate earnings per share (EPS) of 1.48p this year and 4.16p next year. So, at the current share price of 77p, the stock is trading on a forward-looking price-to-earnings (P/E) ratio of 52, falling to 19 using next year’s EPS forecast.
To put these numbers in perspective, the median forward-looking P/E ratio across the FTSE 100 index is about 13.8 right now. So, Rolls-Royce currently trades at a premium to the market. In other words, it’s not a bargain, despite its massive share price fall.
Meanwhile, there’s a fair bit of debt on the balance sheet here. At 30 June, net debt stood at £5.1bn. This adds risk to the investment case, especially now that interest rates are rising. Ultimately, Rolls-Royce is going to be looking at higher interest payments going forward. This will impact profits.
There’s also no dividend here at the moment. This is a turn-off for me. If there was a dividend, I would be getting paid to wait for the turnaround. However, with no dividend, I might not be seeing a return on my money for a while.
Better stocks to buy today
Putting this all together, I’m happy to give Rolls-Royce shares a miss for now. All things considered, I think there are better stocks to buy for my portfolio today.
