Excuse the obvious pun, but Rolls-Royce shares have been on a roll since the beginning of 2023. Meanwhile, my portfolio has bumbled along, still licking its wounds from a very poor showing in 2022.
So, I was a complete fool for not buying in a few months ago, right? Yes and no.
Rolls Royce shares are flying
Based purely on capital gains, steering clear of Rolls-Royce shares has obviously been a poor decision on my part. The price has climbed 53% year-to-date (as I type) with the market embracing new CEO Tufan Erginbilgic’s no-nonsense approach to turning things around.
Put another way, I’d have made £530 on every £1000 I’d put to work at the engineer, excluding the costs of buying the stock.
This makes the company one of the best performers in the FTSE 100 (up 2.5% in 2023 (again, as I type)) and, indeed, the UK market as a whole.
Sure, holders won’t have received any dividends — Rolls hasn’t paid these in years — but I doubt they’re complaining.
Can it last?
The answer, of course, is that no one knows for sure. But let’s engage in a bit of harmless speculation.
On the one hand, recent trading has been encouraging with the company recently revealing underlying operating profit of £652m for 2022. That’s 36% higher than the figure analysts were banking on (£478m).
Unsurprisingly, this has shaken up the market’s view on Rolls. Investment bank UBS, for example, has recently posted a 200p target for the shares. If the re-opening of China goes better than expected — and more flights are taken on planes equipped with the company’s engines — this might prove conservative.
On the other hand, I suspect some traders are itching to bank some profit. The general rise in UK share prices we’ve seen over the last few months could also turn out to be a temporary respite and supply chain woes might continue to impact business activity.
So, Rolls-Royce shares could conceivably fall from here even if the company does everything right.
But none of the above helps me to make a decision about whether to buy. Here’s what does.
Quality business?
As a Fool, I’m in the business of buying, well, great businesses. I also want to hold them for a long time. This puts me in the same camp as Warren Buffett and the UK’s own Terry Smith, albeit only in terms of mentality rather than wealth.
However you shake your stick at it, the FTSE 100 member hasn’t performed well over a longer time period. Take a look at the share price performance over the last five or 10 years for evidence.
My reasoning on this is simply that Rolls just doesn’t exhibit the ‘quality’ hallmarks that help to compound growth. Operating margins are fairly slim and occasionally negative. There’s a fair dollop of debt on the balance sheet. Most importantly for me, returns on capital — what the company generates as a result of money it puts to work — are consistently and woefully low.
So, as encouraging as recent performance has been, this does not strike me as a ‘set and forget’ stock. For these reasons, I still won’t be buying Rolls-Royce shares.
However, my congratulations to anyone who has managed to ride the positive momentum so far.
