For the past three months, the Rolls-Royce (LSE:RR) share price has remained in a fairly tight range around the 150p mark. It has dipped below 145p and briefly had a run to 155p, but it finds itself anchored midway and can’t seem to meaningfully move either higher or lower.
Here are a few reasons why.
Investors treading water
Over the past year, the share price has jumped by 70%. That’s a large move, especially when you compare it to the single-digit percentage gain of the FTSE 100 over the same period.
Part of the reason for the recent consolidation in the price is due to this rapid move higher. When any stock has such a large move, it causes people to stop and think about where it will go from there.
For Rolls-Royce, this shift was driven by the strong full-year results released back in February. It outperformed 2021 results in virtually all metrics. This helped it deliver a profit before tax of £206m vs £36m the prior year. The outlook for 2023 was also very optimistic with changes in strategy.
The recent water-treading I think reflects investors waiting to see if this outlook will be realised, or not. Were the results last year a flash in the pan? Only time will tell, and we could have to wait until August for the half-year results before finding out.
A fair value right here
Another reason why the share price is stalling is due to the shift in valuation. A classic valuation metric is the price-to-earnings ratio. However, due to a negative basic earnings per share from last year, I can’t use it. However, based on the projected 5p earnings per share for 2023, I can use a forecasted P/E ratio of 30 to get a gauge on things right now.
The rise in the share price over the past year has made the P/E ratio increase. Six months ago, when Rolls-Royce shares were below 100p, it was easier to make a case for buying, based on the stock being undervalued.
Yet now, I’d argue that it is fairly valued at 150p alongside a ratio of 30. For example two peers, Howmet Aerospace and MT Aero Engines that operate in the same sector, have P/E ratios of 29.6 and 25.2 respectively.
Until the earnings per share figure changes, the share price movement will dictate any P/E ratio. Therefore, the stock may struggle to materially move as some investors see it as fairly valued.
Deciding what to do
For investors who feel the August results are going to impress, then it still makes sense to consider buying now for long-term future gains. However, for those who don’t have a clear conviction, I don’t think it’s the best purchase right now.
