There seems to be no stopping the Rolls-Royce (LSE:RR) share price. Investor interest in the FTSE 100 engineer continues to soar even as worries over the global economy linger.
At 226p per share, the aerospace giant has surged 178% in value over the last 12 months. Yet despite this rapid ascent it still looks (on paper at least) like an excellent value stock to buy.
City analysts expect Rolls’ earnings per share to soar from 1.95p last year to 8.36p in 2023. Consequently it trades on a forward price-to-earnings growth (PEG) ratio of 0.1.
Any reading below 1 indicates that a share is being sold below value. So should I snap up this UK blue-chip share today?
Heading higher
After it was battered by the Covid-19 crisis, Rolls-Royce has come charging back as commercial travel has recovered following the end of the pandemic.
In fact, the scale of the airline industry’s rebound — which has continued despite the cost-of-living crisis and challenging economic landscape — has surprised even the most optimistic forecasters. This is why Rolls’ share price continues to boom.
The FTSE company expects flying hours for its large engines to reach 80% to 90% of pre-pandemic levels in 2023. That would mark a huge departure from the 43% it saw in 2020 as the world’s commercial fleet was largely grounded.
Its recovery could hit some turbulence if high inflation persists and the global economy struggles. But as things stand there’s a good chance the firm will hit the top end of its large engines’ flying time.
Tufan the man
It’s important to say, too, that the engineer’s recovery isn’t just because of outside influences. Under new chief executive Tufan Erginbilgic, investors believe the company is laying the groundwork for long-term success.
The truth is that the engineer has been delivering disappointing shareholder returns for years. This explains why Rolls’ share price remains around a third lower than it was a decade ago.
But the new man — who has previously described the company as “a burning platform” — is making a big impression since arriving in January. Cost-cutting efforts have impressed, while ‘commercial optimisation’ actions (in other words price hikes and debt collection) are also turning things around.
This all helped Rolls to swing to a forecast-beating underlying pre-tax profit of £524m in the first half from a loss of £111m a year earlier.
Here’s my view on the shares
Having said all of that, I’m not prepared to spend my cash on Rolls-Royce shares today. This is mainly due to the huge financial liabilities the company has racked up following the pandemic.
Okay, net debt has fallen sharply of late to stand at £2.8bn as of June. But its ability to keep cutting it could be limited as its early transformation programme draws to a close, and its cash-hungry product development programmes continue. A fresh downturn in the airline industry would also wallop its debt reduction plan.
High debts could seriously compromise the engineer’s long-term growth prospects. They also cast a shadow over when the business will begin paying dividends to its shareholders.
I’m also concerned about the huge competitive threats the company faces, as well as ongoing supply chain problems. So while Rolls shares look cheap on paper, I’d still rather buy other FTSE 100 value stocks today.
