We’ve waited years for Rolls-Royce (LSE: RR.) shares to climb, and it finally happened in 2023.
If I’d invested £5,000 in the stock as a New Year gift for myself, it would have grown by 50% today. I’d now be happily sitting on a pot of £7,500.
That’s quite a bit better than my Stocks and Shares ISA has done so far this year. So what’s behind the big jump? And is there more to come?
Cash flow
Well, at Rolls it’s all been about cash flow, and that looks better now. The firm had built up huge debt to save itself in the Covid crisis. And as long as cash was still flowing out, there was a big risk that things could get worse.
Could the firm could turn it round by the end of 2022? Well, it did. Rolls made good on its earlier hopes and brought in underlying cash flow of £505m for the full year.
The year before saw a cash outflow of nearly £1.5bn. That shows the scale of the problem, and also the importance of this result.
But before I assume the bull run is on, Rolls-Royce shares dipped again after an update on 11 May. So what went wrong now?
Sticking to guidance
Well, the only thing I can see is… nothing. At least, the firm has stuck to its guidance. The board expects underlying operating profit of £0.8bn-£1bn, with free cash flow of £600m-£800m.
One thing, though, is that free cash flow should be weighted toward the second half. That’s fine by me. But maybe it puts some people off as they think they’ll have to wait a long time for more good news?
I also think the City expects Rolls-Royce to under-promise and over-deliver, as it’s been conservative in its outlook in the past.
It’s great if it can do that. But if we don’t see results that are better than expected, I fear some folk could walk away.
Invest £5,000 now?
But never mind the £5,000 that I didn’t invest at the start of the year. The key question is what might happen if I invest that sum now.
Well, Rolls has a number of business segments, like nuclear power. But for the next few years, it’s still going to be mostly down to those aero engines and the hours they fly.
Rolls says large engine flying hours should be back to 80%-90% of 2019 levels by the end of the year. And that sounds good.
Positive sentiment
Some analysts have upbeat price targets on Rolls-Royce shares too. UBS, for example, has just restated its 200p price target for the stock.
We do need to treat that with caution, though. However, Rolls seems to be on the right track to improve its debt rating. And that could get more investors back on board.
I see debt as the main risk now, and I’ve held back due to it. I still think, though, that if I invest £5,000 now I could do well in the long run.
