Up 50% in 2023, is it time to buy Rolls-Royce shares?

Rolls-Royce shares have been soaring in 2023 as appetite for travel has returned. But is there still room for growth, or has the opportunity gone?

| 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.

Aerial shot showing an aircraft shadow flying over an idyllic beach

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.

Rolls-Royce (LSE:RR) is an engineering company that designs, manufactures, and sells aircraft engines, marine propulsion systems, and other components. Operating for over 100 years, it is one of the largest aerospace companies in the world.

Rolls-Royce shares have been on a wild ride in recent years. The company’s share price peaked in 2013 at over £10, but has since fallen considerably.

What happened to Rolls-Royce shares?

There are a number of factors that have contributed to the decline in Rolls-Royce shares in recent years. These include:

  • The global economic slowdown: The global economic slowdown has led to a decline in air travel. In turn, this has led to a decline in demand for aircraft engines. As Rolls-Royce is a major supplier of aircraft engines, this has significantly affected the company’s revenue.
  • The grounding of Boeing 737 MAX aircraft: In 2019, the US Federal Aviation Administration (FAA) grounded the Boeing 737 MAX aircraft after two fatal crashes. Rolls-Royce is a major supplier of engines for the Boeing 737 MAX, so this caused a great deal of uncertainty about future demand.
  • The COVID-19 pandemic: The COVID-19 pandemic has had a devastating impact on the global economy, including the aerospace industry. The pandemic has led to a sharp decline in air travel, causing Rolls-Royce to lose even more revenue.

What are the positives?

  • Strong track record of innovation: Rolls-Royce has a long history of innovation, and the company is constantly developing new products and technologies. This gives it a competitive advantage in the global aerospace industry. With orders for new aircraft now returning, there is potential for demand to soon reach pre-pandemic levels.
  • Well-positioned to benefit from growth of the global aerospace industry: Following the end of the pandemic, the global aerospace industry is expected to grow in the coming years, and Rolls-Royce is well-positioned to benefit from this growth. The company has a strong portfolio of products and services, and it is also expanding into new markets.
  • Potentially undervalued: The price-to-sales (P/S) ratio of 0.9 times is slightly below the average of the sector at 1.0 times, and discounted cash flow calculations suggest the shares may be 51% undervalued.
  • Future growth forecasts: Rolls-Royce expects earnings growth of 58%, turning a profit over the next three years. This is considerably higher than the sector average of 25%.
  • Strong balance sheet and healthy cash flow: A strong balance sheet gave the company the financial resources to invest in new products and technologies, even during the recent economic downturns. It is working hard to reduce debt levels, and anticipates free cash flow of close to £1bn in 2023.

Am I buying?

Overall, I believe that Rolls-Royce shares could be a good long-term investment. The company has a strong track record, and is well-positioned to benefit from the growth of the global aerospace industry. However, with such a rapid rise in the Rolls-Royce share price in 2023, I am waiting for a pullback from the current price before considering buying any shares.

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.

Gordon Best 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

Investing Articles

1 FTSE dividend stock I’d put 100% of my money into for passive income!

If I could invest in just one stock to generate a regular passive income stream, I'd choose this FTSE 100…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

Forecasts are down, but I see a bright future for FTSE 100 dividend stocks

Cash forecasts for UK dividend stocks are falling... time to panic! Actually, no. I reckon the future has never looked…

Read more »

Young female analyst working at her desk in the office
Investing Articles

Down 13% in April, AIM stock YouGov now looks like a top-notch bargain

YouGov is an AIM stock that has fallen into potential bargain territory. Its vast quantity of data sets it up…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Beating the S&P 500? I’d buy this FTSE 250 stock for my Stocks and Shares ISA

Beating the S&P 500's tricky, but Paul Summers is optimistic on this FTSE 250 stock's ability to deliver based on…

Read more »

Passive and Active: text from letters of the wooden alphabet on a green chalk board
Investing Articles

2 spectacular passive income stocks I’d feel confident going all in on

While it's true that diversification is key when it comes to safe and reliable investing, these two passive income stocks…

Read more »

Investing Articles

The easyJet share price is taking off. I think it could soar!

The easyJet share price is having a very good day. Paul Summers takes a look at the latest trading update…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

9 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

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

As the Rentokil share price dips on Q1 news, I ask if it’s time to buy

The Rentokil Initial share price has disappointed investors in the past 12 months. Could this be the year we get…

Read more »