The past several months have seen some dramatic stock market price action for Rolls-Royce (LSE: RR). Its shares have moved up over 60% since October.
But they are still 14% below where they stood just a year ago. So with the wind seemingly in the firm’s sails, could now be the time for me to buy more Rolls-Royce shares?
2023 momentum
The year has started strongly for the company. Demand for air travel continued to recover last year. This month, China scrapped its main pandemic-era travel restrictions, a move that could help global travel demand recover further. That should be good for Rolls-Royce, as the more hours its installed base of plane engines fly, the greater the demand for servicing. That can help revenues and profits.
Meanwhile, demand is set to remain buoyant in other markets that are important for the engineer, such as power systems and defence. Having substantially reduced its drawn debt last year, the company’s balance sheet is looking in better shape than it has done for some years.
If the firm can simply keep performing well and controlling costs, I think its business could perform strongly this year. That could be good for Rolls-Royce shares.
Valuation questions
That sort of optimism explains the recent spike in the share price, which burst through the pound level.
But where does that leave Rolls-Royce shares in terms of valuation? After all, earnings per share last year were just a fraction of a penny.
Based on that, the share price hardly seems like a bargain. I think the current share price reflects City expectations that the company will substantially boost income in the next several years, thanks to growing revenues and keen cost management.
Will that happen? At the moment, the business definitely seems to have good momentum. However, some things might still trip it up. For example, travel demand could fall again due to a tough economy or some unexpected event, hurting revenues. But on balance, I remain upbeat about the outlook for the company.
It has a strong position in a complex market that has high barriers to entry due to the capital expenditure and technical expertise required. I think that could help the company make strong profits in coming years. On that basis, I think the current market capitalisation of under £9bn looks like a possible bargain.
Should I buy the shares?
I continue to see further upside from here. Rolls-Royce shares have been performing well lately but still look undervalued relative to the firm’s long-term prospects, in my view.
If I had spare money to invest and did not already own quite a few, I would load up on the shares for my portfolio. However, I already have a sizeable position. So I plan to hold without expanding, while hoping that the business continues to perform strongly and its shares follow.
