Rolls-Royce (LSE: RR) shares just keep on climbing. They’re up 40% in the last week, 90% over six months, and 140% over one year.
I’m happy to say that I bought shares in the FTSE 100 aircraft engine maker right at the start of their blistering recovery on 1 November for around 81p. Today, the share price stands at 208p.
I’m up 155% which is absolutely brilliant… but for one thing. I was low on funds at the time, and bought a smaller-than-usual stake.
Today, I have more money at my disposal after transferring three legacy pensions into a self-invested personal pension (SIPP). But is Rolls-Royce now too costly?
A real high roller
I much prefer buying shares when they are down in the doldrums rather than flying high. This makes me wary. Especially since I want to up my stake considerably and could easily wipe out my gains so far if the stock retreats from here.
The speed of the Rolls-Royce recovery has taken everybody by surprise, including me and new CEO Turfan Erginbilgic. Its share price was highly volatile during the pandemic, as bargain seekers and profit takers fought it out.
Recent acceleration is built on stronger foundations, following the recent 31% jump in first-half underlying revenues to £6.95bn.
Full-year profits have been upgraded to between £1.2bn and £1.4bn (up from a range of £800m-£1bn) and cash flows are set to rise sharply too.
This is down to a number of factors, including the recovery in airline miles flown, new contract wins, a strong performance by its Defence and Power Systems operations, and cost-saving measures implemented during the dark days.
Rolls-Royce also has a new product to excite investors, in the shape of its planned fleet of £2bn mini-nuclear reactors. It’s reminding investors that this could still be a great British engineering company.
In 2022, Rolls-Royce posted net revenues of £13.25bn. Markets now expect that to top £14.4bn in 2023 and £15.4bn in 2024. Investors may even enjoy a dividend next year, although this will start from a low base with an initial yield of 0.63% forecast.
The debt doesn’t worry me
That all looks promising for a stock currently trading at just 18.7 times forecast earnings for 2023. But has Rolls-Royce been overbought?
One longstanding concern is debt. Rolls-Royce still owes £2.8bn, which will make it harder to invest in product development. I’m not too worried though. The figure in 2021 was £5.2bn. Last year, it was £3.3bn. Net debt is heading in the right direction, thanks to disposals and improved cash flows.
Rolls-Royce has plenty of tailwinds but my big concern is that these are priced in. Expectations are now sky-high and if it falls short, sentiment could shift. Finally, sod’s law also makes me hesitate. If I pile in now, the stock is bound to fall, isn’t it?
Yet I have one strong argument in favour. If I buy Rolls-Royce today, it would be with the aim of holding for 10 years and ideally much longer. With luck, today’s share price 208p will look cheap one day. I think I’ll take a chance and buy it this month.
