Rolls-Royce Holdings (LSE: RR) shares took off on 26 July when the well-known FTSE 100 aerospace and defence company issued a scorching trading update.
The directors said results for the first half of the year will be “materially above” consensus expectations. And that kind of statement often excites the market for two reasons.
The first is that ‘materially’ usually means a lot, or at least a quantity worth consideration. And second, ‘above expectations’ means the news is probably new and unknown by the market.
And Rolls-Royce shares have responded well. At 185p, the stock is around 21% higher than its closing level the previous day.
To set the move in context, the share price is around 110% higher than it was a year ago. So shareholders have enjoyed a good run from this recovery situation already. But there could be more to come in the years ahead.
This turnaround is turning
The company said its first-half results are “significantly” improved with higher underlying operating profit and free cash flow.
And the directors raised their guidance for the full year. They now expect underlying operating profit to come in between £1.2bn and £1.4bn. And free cash flow to be between £0.9bn and £1bn.
Back in May, the top end of estimates was for operating profit of £1bn and free cash flow of £0.8bn. So the new figures represent a big improvement. And that probably means the buoyant reaction of the stock is justified.
The directors reckon the outcome has been driven by “early transformation benefits”. And that means to me that Rolls-Royce is one of those rare stock-beasts where the turnaround in the underlying business is actually working.
Chief executive Tufan Erginbilgic supplied more detail. The multi-year transformation programme has started well. And progress is already evident in the strong initial results and increased full-year guidance for 2023, Erginbilgic said.
More to play for?
However, “there is much more to do” to deliver better performance and to transform Rolls-Royce into a high performing, competitive, resilient and growing business.
And that statement suggests there may be more for investors to play for by holding Rolls-Royce shares now. After all, even now the levels of net profit expected are way down from the outcomes the company achieved in 2017 and before then.
Erginbilgic continued by saying the business is starting to see the early impact of transformation in all its divisions. And that’s despite a challenging external environment with supply chain restraints.
However, my belief is the general economic environment will likely improve in the years ahead. And Rolls-Royce will perhaps see supportive conditions in which to execute its transformation strategy. So I’m bullish on the stock.
However, the valuation is well up with events and that adds risk for investors because it may decline once the initial excitement dies down. And on top of that, any company can run into setbacks and operational difficulties that may thwart expectations.
Indeed, the share price has been volatile over the past three years and may continue to be so.
Therefore, it may take a stout heart for any investor to hold on as the turnaround matures.
Nonetheless, I’d be inclined to research and watch Rolls-Royce closely now. And I believe there’s potential for the shares to make a decent investment.
