Rolls-Royce (LSE: RR) shares surged last week after first-half preliminary results. They jumped from 153p to 193p in a matter of days. All this, after the shares were only 67p less than a year ago.
Here are the highlights:
- H1 operating profit was £660m-£680m (consensus: £328m)
- H1 free cash flow was £340m-£360m (consensus: £50m)
- Full-year operating profit guidance was £1.2bn-£1.4bn (consensus: £0.9bn)
- Full-year free cash flow was £0.9-£1.0bn (consensus: £732m)
The firm was very keen to point out its results compared to expectations. I think it’s fair to say it smashed them. This is a great sign that the company is being well run and has good momentum.
CEO Tufan Erginbilgic added that this was part of an ongoing “transformation”. He expects further growth in the future, in which case, are Rolls-Royce shares a slam-dunk buy even at this higher price?
To be clear, I do own shares here already. I was already optimistic about the firm’s prospects and this uplift has made me think about picking up a few more. Of course, I’d now be looking at an inflated price.
Overpriced?
Is it overpriced? Well, lately, Rolls-Royce shares have been tricky to value due to a lack of earnings. Because the company makes its money through making and maintaining aeroplane engines, the pandemic was bad for business. As such, it hasn’t posted a profit for three years.
Looking at revenue instead, the firm turned over £13bn last year. That doesn’t look too demanding compared to a market value that is now around £16bn. Not cheap, but not terrible value, especially if profits and growth are on the way.
Whether we see that happening is largely down to Erginbilgic. When he took over, he called Rolls-Royce a “burning platform” that must transform. Outside of making a few headlines, the message was clear — he was there to make big changes.
It’s hard to argue with the results so far. When he took the corner office on January 1 this year, the shares cost only 93p. They’ve more than doubled since then.
A buy?
Will the shares continue on this trajectory? I wouldn’t like to say for sure. There’s a £3bn debt pile to deal with, built up to keep things ticking over during the pandemic. The financing costs from that might weigh down future growth opportunities.
Also, the above results weren’t out of left field. Yes, it’s to be applauded that Rolls beat expectations, but now that planes are flying as normal you’d expect to see good results. And the shift in momentum looks like it might already be in the price.
In all, I’m happy to hold my shares but I don’t think I’d buy more. I’d simply say there are better bargains around at the moment.
