For much of 2022, the Rolls-Royce Holdings (LSE: RR) share price was languishing well below £1. But what a difference a few months can make.
Since mid-October, Rolls-Royce shares have gained 60% to reach 106p. And there’s really no sign of the recovery stopping yet.
I’ve been following Rolls-Royce for some time now, seeing it as a long-term recovery candidate. But have I missed my opportunity? Well, I might have missed the very bottom by not buying last summer, but I’m not bothered by that.
Opportunity vs risk
The share price might have been lower six months ago, but I reckon the risk was a good bit higher then. I always prefer to wait until I see evidence of a recovery, even if that means I might miss a rock-bottom share price.
In October, inflation was pushing above 10%, and economists were predicting figures as high as 14% or 15% before things start to soften. That didn’t offer much hope for the holiday aviation market.
Interests rates were soaring too. And who thinks about jetting away to far-flung places when they’re worried about paying their mortgage? Oh, and fuel bills too — energy costs were going through the roof.
Trading update
Rolls-Royce itself has been reporting an encouraging improvement in trading. In November, the company had record order intake in its Power Systems division. And large engine flying hours were back to 65% of 2019 levels, up 36% year-to-date.
After the disposal of ITP Aero, Rolls was also able to repay £2bn in loans. So, business getting back on track, and the balance sheet heading in the right direction.
I’ve long been convinced that Rolls-Royce would get back to long-term earnings growth. But two things have kept me from buying.
Economics
One, as I’ve already suggested, is the wider economic environment. But the economists’ worst fears might not be coming to pass. Inflation appears to be levelling off, not getting close to 15%. And we’re even hearing claims of GDP growth for October and November. It’s only a small uptick, but it’s not recession.
And, well, the general outlook is still gloomy. But it’s not looking like the rolling thunderstorm that so many had feared.
Valuation
The share valuation is the other thing that’s held me back. Results for 2022 are due on 23 February. Based on forecasts, we’d be looking at a price-to-earnings (P/E) ratio of around 95. That doesn’t mean much at this stage, mind. And analysts see it dropping to 32 for the coming 12 months, and to 17 by 2024.
So, could I double my money if I invest now? If next month’s figures beat expectations, if 2023 goes as well as investors hope, and if debt keeps coming down, I think there’s a good chance. If not in the short term, at least over the next five years.
So will I buy? I really want to. But I only have so much money. And right now I think I see more attractive shares with lower risk out there. Rolls is definitely still on my watchlist, though.
