Up over 100% in 6 months, is now the time to buy Rolls-Royce shares?

Rolls-Royce shares have more than doubled in the space of half a year. Have I already missed the boat or could there be more gains ahead?

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It can be a tad frustrating when a stock I’ve been watching goes up a lot in a short space of time. That’s basically what’s happened with Rolls-Royce (LSE: RR) shares.

I’ve witnessed them more than double over the last 26 weeks while I’ve sat on my hands. When I had less grey hair than today, I might have bought the rising stock for fear of missing out (FOMO).

But over time I learned to stop doing that, as Mr Market has a nasty habit of turning up to offer me a stock for less than I’d already paid for it. Sometimes patience really can be a virtue.

Anyway, I see that the Rolls-Royce share price has levelled off in the last month. So is now a good time for me to invest?

The turnaround continues

In late February, the engine maker reported its full-year results for 2022. And there were plenty of reasons for optimism.

Its revenue grew to £13.5bn, up from £11.2bn in 2021. Meanwhile, it recorded £652m in underlying profit, which was £238m higher than the previous year.  

Importantly, a recovery in engine flying hours helped increase its free cash flow to £505m. That was up by a massive £2bn over 2021. While this is still not enough to put a major dent in its £3.3bn net debt, which remains a concern, it’s a very encouraging sign.

Its Civil Aerospace division remains its largest. So the restarting of travel in and out of China is a huge deal for the company. Its engines power 60% of China’s widebody planes and 90% of the country’s Airbus A330 fleet.

Today, the middle class in China numbers over 400m people. And the country is expected to overtake the US as the world’s largest passenger aviation market by 2030. So the long-term demand for the company’s engines looks likely to increase substantially.

Optionality

One of the things I value in a business is optionality. That is, a company’s ability to identify and capitalise on new growth areas. This gives it multiple ways to grow and, I believe, a greater chance of succeeding over the long term.

For me, Rolls-Royce has abundant optionality.

Its Power Systems segment continues to grow. And its Defence division just announced a deal to provide reactors for Australia’s new fleet of nuclear-powered (though not nuclear-armed) submarines. This is part of a massive defence agreement between Australia, the UK, and the US.

Plus, the firm just secured funding to build a small nuclear reactor for a planned permanent human base on the Moon.

I think the company has many ways to win.

Will I buy the stock?

I’ve become increasingly bullish on Rolls. In fact, I think we could be in the foothills of a massive multi-year turnaround in the share price.

Of course, that’s assuming the company continues to make good progress, particularly in reducing its debt pile. But I see no reason why it shouldn’t given the reopening of China’s borders and a renewed focus on operational efficiency.

Furthermore, the stock is still 62% lower than it was a decade ago, despite its recent rise.

I’ve seen enough progress to warrant moving the shares from my watchlist to my buy list.

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.

Ben McPoland 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.

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