Shares in Rolls-Royce Holdings (LSE: RR.) are among the most widely held and traded in the London market. Indeed, they usually feature among the top-five weekly buys and sells for retail investors. But the Rolls-Royce share price has surged dramatically this year, leaving me wondering whether it has leapt too far, too fast.
The shares soar
As I write (early on Wednesday afternoon), Rolls-Royce stock hovers around 155.5p a share. This values the acclaimed British engineering firm at £13bn, making it a FTSE 100 stalwart. However, the group came uncomfortably close to collapse during the Covid-19 crisis of 2020-21.
At present, the shares are only 2.8% below their 52-week high of 160p, hit on 9 March. Even better, they are over 90p above their 52-week low of 64.44p, set on 28 September 2022.
Here’s how the Rolls-Royce share price has performed over five different timescales:
| Five days | -0.5% |
| One month | +7.7% |
| Year to date | +66.7% |
| One year | +78.5% |
| Five years | -54.2% |
My table shows that owning shares in Rolls-Royce over the past 12 months has been a very pleasant experience. The stock is up by two-thirds this calendar year and has rocketed by almost 80% over one year. However, the five-year return clearly shows the terrible damage caused by the coronavirus pandemic.
By the way, these figures exclude cash dividends, which the company hasn’t paid since a 4.6p-a-share handout on 3 January 2020 — mere weeks before Covid-19 crashed financial markets.
Could this harm the share price?
Last year, the business was loss-making and didn’t pay a dividend, so it’s not possible to value the stock on basic fundamentals.
However, in its latest full-year results, Rolls-Royce’s balance sheet included £3.3bn of net debt (including leases). And one problem about this debt that worries me is that the vast majority of it needs to be repaid over the next four years.
Indeed, according to analysts at JPMorgan, more than three-quarters (77%) of Rolls-Royce’s debt is set to mature between 2025 and 2027. With interest rates still rising on both sides of the Atlantic, this ‘maturity cliff’ could well put a strain on Rolls-Royce’s future finances — and its share price.
I’m not buying
Then again, I could well be wrong. After all, thanks to disposals and asset sales, net debt tumbled from £5.2bn to the current £3.3bn, falling by £1.9bn in just 12 months. So maybe I’m being paranoid and Rolls-Royce will comfortably cope with its debt demands?
Although it’s clear that Rolls-Royce’s prospects have improved markedly due to strong demand for air travel, I won’t be buying its stock any time soon. The shares have been the best performer in the FTSE 100 over one year, so they have been a great momentum trade. But as a veteran value investor, I simply don’t see this stock as a bargain buy today!
