Has the Rolls-Royce share price levelled off?

The Rolls-Royce share price has soared over the past month. This writer explains what he thinks might happen now — and the move he recently made.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Jumbo jet preparing to take off on a runway at sunset

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

A core expertise of aeronautical engineer Rolls-Royce (LSE: RR) is gaining altitude fast. In the past few years though, that was not something associated with the Rolls-Royce share price. The shares have halved in value over the past five years.

Recently, things have been looking up. The shares are up 58% over the past 12 months. In just a couple of weeks at the end of last month and start of March, they gained 47%. Since then however, the Rolls-Royce share price looks like it has been taking a breather.

Can it continue its upward ascent, or has the recent rally fizzled out?

Positive momentum

The main reason for the uptick in the Rolls-Royce share price was the release of last year’s results, alongside the unveiling of a programme designed to improve the long-term profitability of the engineer.

But I think those have now been factored into the share price. After all, on a statutory basis, the company made a £1.5bn loss last year. Rolls-Royce has net debt of £3.3bn. The market capitalisation of £12bn therefore does not look cheap to me. I think investors are pricing in the prospects of improving business momentum and more attractive future business economics.

At this point though, I think it is time for the firm to show not tell. Rolls-Royce now has to grow into its expanded valuation. For it to move higher still, I think we need to see a sharply improved commercial performance. That will likely take months, if not years, to materialise.

What comes next

The business certainly could improve its performance. Rolls-Royce has the wind in its sails at the moment. Global civil aviation demand has bounced back strongly, demand from defence clients is set to grow and the company’s programme to improve profitability could see cost-cutting that boosts margins. Its strong brand and large installed base of aircraft engines are a valuable competitive differentiator.

But there are execution risks. Aviation demand remains fragile and could be hurt by soaring ticket prices at a time when many households are cutting their leisure spending. Business aviation demand remains lower than before the pandemic and I think a rise in online meetings means some business travel has gone away forever.

My move

The sharp move upwards in the Rolls-Royce share price meant the stake I bought when the shares sold for pennies each showed a handsome profit.

I was tempted to hold the shares for longer, as I think that they could move up further if the coming year starts to show some early fruits from the transformation programme.

But I see risks and feel that the current price is already fairly generous, given that Rolls-Royce just reported a sizeable loss and the impact of its cost-cutting programme remains unclear. It may improve margins, but also damage employee morale or customer confidence. In the long term, either of those things could be bad for the company.

I like the business and would be happy to buy in again in future at an attractive price. For now, I suspect the Rolls-Royce share price may have levelled off after its steep rise. In any case, I see the valuation as a little demanding. I therefore took advantage of it recently to sell my stake at a profit.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

3 UK stocks I reckon could benefit from the upcoming general election

As the general election hurtles towards us, this Fool wonders which UK stocks could benefit, and focuses on three picks…

Read more »

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

At 11%, this dividend share pays the biggest yield in the FTSE 100

When a dividend share offers a big yield, we need to be cautious of the risks. But I reckon this…

Read more »

British Isles on nautical map
Investing Articles

I reckon Hiscox shares could be one of the best bargains on the FTSE

I've been investing in FTSE companies for years, but after a major decline I've not seen a company with as…

Read more »

Grey Number 4 Stencil on Yellow Concrete Wall
Investing Articles

4 reasons I’d still buy National Grid shares in a heartbeat despite the recent wobble!

As National Grid shares plunged on the news of a right issue, I’m not flinching, and reckon it's a top…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

After gaining 45% in 12 months, is the Amazon share price now overvalued?

Our author thinks the Amazon share price might be too high. While the long-term future of the business looks bright,…

Read more »

Investing Articles

2 hot dividend stocks I’d buy and hold for 10 years

Our writer reckons these two dividend stocks could help her bag juicy dividends for years to come and explains why.

Read more »

British Pennies on a Pound Note
Investing Articles

2 dividend-paying penny shares I’d happily own

These two penny shares have caught our writer's eye for a combination of income prospects now and business growth potential…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

This FTSE 250 share looks like a bargain to me!

This FTSE 250 share has seen its price tumble due to chaotic local economic conditions in a key market. But…

Read more »