Should I buy, hold or sell Rolls-Royce shares at 225p?

Rolls-Royce shares have risen another 8.5% in the past month alone. Now this Fool is wondering what to do with his holding.

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The turnaround in Rolls-Royce (LSE: RR) shares has been truly remarkable. Just over three years ago, they were languishing at around 38p each. Today, the share price has reached 225p for the first time since Covid wreaked havoc on the business in March 2020. That’s an incredible 490% rise!

Should I now sell, hold, or buy more Rolls-Royce shares?

The case for selling

When CEO Tufan Erginbilgiç started the job in January, he called Rolls-Royce a “burning platform” that was severely underperforming its competitors. The transformation plan he implemented, including cost cuts, price rises, and the disposal of non-core assets, has worked remarkably well so far.

In its H1 2023 results announced last month, the FTSE 100 engineering group reported an underlying operating profit of £673m, a fivefold increase from the first half of 2022. This enabled it to raise its profit guidance for the full year.

However, Erginbilgiç recently warned that much of the early turnaround is now complete. The rate of improvements, he said, would not be as dramatic from this point onwards.

For example, net debt improved to £2.8bn in June, down from £3.3bn at the end of last year. But it’ll be difficult to reduce this further by disposing of more assets because most non-core businesses have already been sold off.

Perhaps, then, this might be an opportune time for me to sell.

The case for buying more

That said, air travel passenger numbers are now nearing pre-pandemic levels. And Rolls-Royce expects large engine flying hours to reach between 80% and 90% of 2019 levels this year. If they were to reach 100% at some point, that could send the shares up even further.

Plus, the first-half operating margin of 12.4% in its civil aerospace business, which makes up roughly half of the group’s revenue, was the highest it has been for many years. Yet, even after its recent surge, the share price remains 33% lower than it was five years ago.

Also, brokers remain bullish. Of the 18 analysts covering the stock, half have it down as a ‘buy’ or ‘strong buy’. None are recommending clients to sell.

Now, I wouldn’t rush out and buy shares just on the opinion of analysts. But it’s also worth recognising that their opinions do play some part in the direction of share prices. For example, Tesla stock rose 10% yesterday (11 September) after a bullish Morgan Stanley upgrade.

So, the positive analyst consensus on Rolls-Royce stock might make this a good time for me to top up.

My decision

What will I do then? Well, I’ve decided that I’m certainly not going to sell my shares. After all, I only bought them six months ago. And as Warren Buffett cautions: “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes“.

But I’m also not going to rush out and add to a stock that has almost tripled in 12 months.

I note that the firm is holding a capital markets day in November, during which management will share the outcome of its ongoing strategic review. It will also set medium-term financial targets. I’d like to hear these before making a move or not.

So I’m going to keep on holding.

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.

Ben McPoland has positions in Rolls-Royce Plc and Tesla. The Motley Fool UK has recommended Tesla. 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.

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