The Rolls-Royce share price has almost recovered. Is it too late to buy?

The Rolls-Royce share price is on fire, with the stock more than doubling in the last 12 months. But can this momentum continue into 2024?

| 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.

Jumbo jet preparing to take off on a runway at sunset

Image source: Getty Images

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.

The last 12 months have been terrific for the Rolls-Royce (LSE:RR.) share price. After being decimated by the 2020 pandemic, the group has undergone a radical internal transformation to narrowly avoid bankruptcy. And what’s emerged is a far leaner operation with lower debt and significantly higher profit margins. Therefore, it’s no surprise that the shares have climbed nearly 150% over the past year.

In fact, the stock is now only around 30p shy of returning to pre-pandemic levels. So, with the recovery almost complete, is it too late to invest in this FTSE 100 engineering giant?

What’s next?

Looking at the group’s latest half-year results, there are a lot of encouraging signs. For starters, net debt, which has long been a problem for this company, dropped from £3.3bn to £2.8bn. And a closer look at the loan book reveals management has restructured its borrowings to be almost entirely fixed rate. In other words, further interest rate hikes by the Bank of England won’t compromise the financial health of this enterprise.

Over on the profitability side of the equation, earnings per share came in at 14.7p versus a loss of 19.29p last year. And net cash flow from operating activities more than doubled.

There are a lot of factors behind these significant improvements. However, at the heart lies Rolls-Royce’s Civil Aerospace division. With long-haul travel finally ramping back up, demand for the group’s services is following suit, providing solid revenue growth. And with many fixed costs involved in manufacturing and maintaining plane engines, the division had an underlying operating margin of 9.7% compared to 2.4% in the first half of 2022.

Meanwhile, its Power Systems and Defence segments also saw improved performance as more cost efficiencies were introduced.

Pairing all this with the excitement surrounding the firm’s role in the revival of the UK’s nuclear energy sector, these shares look like they could have a bright future.

The bear case

As encouraging as these headlines are, there’s still a lot of work to be done. And the recent growth may not be as impressive as it seems on the surface.

For starters, a lot of the recent expansion stems from the recovery of its Civil Aerospace division. However, with the long-haul travel market nearing pre-pandemic levels, growth may be set to slow considerably. And with it, the recent share price momentum.

At the same time, there’s still £4.9bn of long-term loans to address. And fixed rate or not, that’s adding pressure to the bottom line. The reintroduction of free cash flow can provide the funding needed to minimise leverage. However, that also means there’s less funding available for research & development – a critical process for an engineering firm competing with the likes of BAE Systems and General Electric.

The bottom line

All things considered, the Rolls-Royce share price looks like it has tremendous potential in my eyes. However, I think there are still some important questions currently left unanswered. Personally, I want to see how the company performs once the recovery tailwinds stop blowing. Only then will investors know whether these shares are nearing their peak or if this recent growth is just the tip of the iceberg.

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.

Zaven Boyrazian 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

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

1 hot UK growth stock I’m buying right now

I've more than doubled my money on this UK growth stock. But with a 948% boost to earnings, I think…

Read more »

Illustration of flames over a black background
Investing Articles

In freefall after earnings, is this FTSE 250 company now a bargain?

Yesterday's earnings report from Future caused a major drop in the share price, but is this FTSE 250 company now…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

After a strong first half, this is one of my top FTSE 100 stocks to buy for 2024

I'm looking for FTSE stocks to buy as we get close to 2024. This one, with a healthy outlook for…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

How to earn passive income using the Warren Buffett method

Warren Buffett’s investment in Coca-Cola earns spectacular passive income. Stephen Wright looks at how to try and make a similar…

Read more »

Road trip. Father and son travelling together by car
Investing Articles

Could Tesla shares turn £10,000 into £53,410 by 2033?

Some influential people believe Tesla shares could soar to $1,275 within 10 years. Is this likely, or typical of the…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Top Stocks

5 small-cap stocks Fools think will soar in the next bull market

Finding the 'next big thing' in the stock market is no easy feat. However, some of our Foolish writers think…

Read more »

Growth Shares

Should I buy Rolls-Royce shares for 2024 as brokers raise their price targets to £4?

City analysts are growing increasingly bullish on Rolls-Royce shares. Should Edward Sheldon buy them for his portfolio for 2024 and…

Read more »

2024 year number handwritten on a sandy beach at sunrise
Investing Articles

Are UK shares set to soar in 2024?

With 2024 on the horizon, this Fool looks at what the year could entail and explores whether now could be…

Read more »