At 210p, should I buy, sell, or hold cheap Rolls-Royce shares in October?

With Rolls-Royce shares still some way off their previous all-time high, our writer looks at the case for buying, selling, or holding in October.

| 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.

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

In the last 12 months, the Rolls-Royce share price has rocketed. At this time last year, investors could purchase shares for 70p a piece. Today, I’d have to fork out around 210p.

But that’s still lower than the 436p I’d have paid in December 2013. This shows that there’s still a significant way to go if Rolls-Royce shares are to surpass their previous peak.

So, despite being approximately 200% more expensive than October 2022, but 51% cheaper than December 2013, would I buy, sell, or hold the engine maker’s shares in October? Let’s try and find out.

The bullish case

The main factor behind the group’s recent strong performance is the post-Covid surge in international air travel. This has boosted revenues and brought back some business momentum. Simultaneously, heightened geopolitical tensions have served to boost defence outlays.

In August, Rolls reported a rise in first-half underlying revenue from £5.3bn to £7bn. Increases across the civil aerospace, defence, and power systems segments fuelled this solid performance.

Even more impressively, underlying operating profit came in at around double what the previous market expectations were, rising from £125m to £673m. Performance here was driven by higher revenues and improved profitability in the group’s critical civil aerospace division.

I also find the company’s multi-billion pound order book very reassuring. After all, it gives the group a substantial amount of visibility over future revenue.

Perhaps more importantly though, Rolls’ position in the defence and aerospace industry remains as robust as ever. Relative to other sectors, the extremely high barriers to entry reduce the number of smaller competitors looking to enter the market. And it’s likely to stay that way for some time.

The bearish case

While it’s hard to deny the worst is now over for Rolls-Royce, it’s difficult not to feel uncomfortable with the group’s negative equity position. In simple terms, the company’s liabilities continue to outweigh its assets.

Consequently, the company won’t offer dividends until it achieves a more financially stable position.

Furthermore, the path towards reducing net debt won’t be straightforward for Rolls. All it would take is an unexpected economic downturn or crises for revenue streams to take a hit. This would make it difficult to generate the necessary cash flows for debt reduction.

Finally, with a huge amount of revenue contingent on how many hours the engines that Rolls-Royce services spend in the air, I can’t help but find it a drawback that engine flying hours (EFH) aren’t expected to return to pre-pandemic heights until the end of 2024.

Buy, sell, or hold?

All things considered though, if I was a Rolls-Royce shareholder, I’d definitely hold.

Steadily increasing volumes and an improving financial outlook suggest to me the potential for long-term growth provided I was willing to stomach any short-term volatility.

In fact, on that basis I’d be inclined towards buying more shares, particularly given the group’s success in raising prices while simultaneously cutting costs and disposing of non-core assets.

For now though, I’ll have to be content watching this one from the sidelines since I haven’t got any cash to spare.

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.

Matthew Dumigan 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

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 overlooked cheap shares I’m tipping to eventually soar

These two cheap shares may not be obvious bargains, but our writer explains the investment case behind buying them for…

Read more »

Investing Articles

1 no-brainer pick I’d love to buy for my Stocks & Shares ISA!

A Stocks & Shares ISA is a great investment vehicle for our writer. Here she explains why, and one stock…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

Just released: our 3 best dividend-focused stocks to buy before May [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

Will the Rolls-Royce share price keep rising in 2024?

With the Rolls-Royce share price going on a surge, this Fool wants to look forward to where it could potentially…

Read more »

Investing Articles

£10k in an ISA? Here’s how I’d target a regular £30k+ second income stream

Reliable dividends can help provide a lot more financial freedom. Here's how I'd aim for a substantial second income inside…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Lloyds share price hanging on to 50p ahead of Wednesday’s Q1 earnings report. Where to now?

Down in April and with low earnings expected this week, Mark David Hartley investigates where the Lloyds share price might…

Read more »

artificial intelligence investing algorithms
Investing Articles

Everyone’s talking about AI! Here’s 1 FTSE stock to consider buying for exposure

A hot topic right now is artificial intelligence (AI). This Fool explains how this FTSE stock could offer investors an…

Read more »

British Pennies on a Pound Note
Investing Articles

1 penny stock I’d buy today while it is 99p

Ben McPoland highlights Windward (AIM:WNWD), a fast-growing penny stock that could benefit from the artificial intelligence revolution.

Read more »