2023 has been a good year for Rolls-Royce (LSE: RR) shares as they’ve climbed 49.5% year-to-date, continuing their strong autumn run. Measured over 12 months, they’re up 75.66%.
The aerospace engineer’s stock has easily outpaced the FTSE 100, which has crept up a meagre 0.57% so far in 2023, and 1.01% over 12 months.
I’m currently buying UK shares in preparation for the next stock market rally. I’m betting it’ll come in the autumn but frankly, nobody knows for sure.
A small matter of luck
Happily for me, the shares have been staging a rally all of their own. I bought them on 1 November last year and so far I’m up 78.79%. Unsurprisingly, it’s the best performing stock in my portfolio over that period.
I bought the stock because I thought it finally looked good value after dropping 75% over five years. I got lucky with my timing and only wish I’d bought more. But are they still good value today and will they enjoy another lift when the long-awaited rally arrives?
The answer to the latter question is probably yes. A rising tide lifts all boats, and FTSE 100 shares should get an automatic boost as money pours back into trackers and actively managed funds. The bigger question is whether Rolls-Royce can grow by its own efforts.
New CEO Tufan Erginbilgic has been talking tough and cutting costs, while investors wait to see if he can match words with action. He only joined in January and so far the jury is out.
He’s enjoying one tailwind, as a recent update reported that large engine flying hours had climbed to 83% of 2019 (pre-pandemic) levels in the four months to April 30. That should boost revenues as the aircraft engine-maker’s all-important maintenance contracts are based on miles flown.
Moving onwards and upwards
Rolls-Royce has also successfully completed the first tests of its “game changer” UltraFan technology demonstrator, which delivers a 10% percent efficiency improvement over the Trent XWB aero engine. It is pushing forward in other areas, including small-scale nuclear reactors, although Erginbilgic has just pulled its direct carbon capture operation, as part of his streamlining strategy.
Rolls-Royce expects underlying operating profits of £800m to £1bn this year, with free cash flow of £600m to £800m. That’s positive, but it’s hardly boom time and that’s what makes me wary of adding to my holdings today.
I got lucky when I bought Rolls-Royce shares last November. They looked oversold then, but that’s no longer the case after their recent strong rally. The company now trades at a price/earnings ratio of 33.1 times for 2023, well above the FTSE 100 average of around 14 times. That’s a bit pricey, even if it’s forecast to fall again in 2024 to 20.7 times.
Revenues are expected to rise from £13.9bn in 2023 to £14.94bn next year, showing Rolls-Royce is pointing the right way. However, for now I’ll hold what I’ve got rather than buy more. Instead, I’ll look for other underpriced opportunities that could soar when markets get their mojo back. If the Rolls-Royce share price dips in the interim, I’ll take another look.
