The Rolls-Royce (LSE:RR) share price has rebounded strongly in recent weeks. It’s risen around a third in value since the middle of October, in fact.
Yet despite these heady gains, the FTSE 100 firm still seems to offer tremendous value. City analysts think earnings will rocket 245% year on year in 2023. This leaves it trading on a forward price-to-earnings growth (PEG) ratio of just 0.1.
Any reading below one indicates that a stock is undervalued.
Taking off
Rolls-Royce shares have taken off thanks to the airline industry’s solid post-pandemic recovery. Recovering profits bode well for orders of plane engines. Increased flight hours also translate into greater demand for the company’s aftermarket services.
A bright outlook for the defence industry has also boosted Rolls-Royce’s share price. Market sentiment towards the business has also improved on positive news concerning its development of green technologies. Last month, for example, it successfully ran one of its engines on hydrogen fuel, a world first.
Big risks
But I’m not comfortable investing in the engineer just yet. Not even the cheapness of its shares is enough to tempt me in. I remain very concerned by the size of the company’s enormous debt pile.
Despite a string of asset sales, Rolls still had a whopping £4bn worth of undrawn debt as of October. These huge liabilities and enormous debt costs could well undermine Rolls’ ability to fund its ambitious growth programmes.
The business may also struggle to pay this down if conditions in its markets suddenly worse. Persistently high cost inflation and supply chain issues might also hamper its debt-cutting plans.
These factors pushed Rolls into a £1.6bn loss between January and June. And the business has said it expects these problems “will persist into 2023”.
2 better FTSE 100 shares
I’d much rather buy other cheap FTSE 100 shares for my portfolio today. There are so many for me to choose from, too, that I don’t feel I need to take a risk with Rolls shares.
I’d rather use any spare cash I have to increase my stake in Ashtead Group, for example. This blue-chip share trades on a PEG ratio of just 0.6 for financial 2023.
A downturn in the US construction industry poses a threat to the rental equipment business. But I’m confident that the company’s drive to boost market share should allow it to keep growing earnings.
Indeed, Ashtead’s successful expansion strategy pushed adjusted pre-tax profits 28% higher between August and October.
I’d also rather invest in GSK than Rolls-Royce shares. Its forward price-to-earnings (P/E) ratio of just 10 times offers great value for money. And unlike the engine builder, it pays a dividend. This provides a bonus of a 3.9% dividend yield.
Problems at the development stage are a constant threat to drugs companies’ earnings. But on balance I think the benefits of owning GSK shares outweigh the risks.
Sales of its essential medicines should rise strongly as the global population increases. The business has a packed product pipeline which could help it exploit this long-term opportunity, too. GSK recorded 65 vaccines and medicines in development as of September.
