For most of the last year Rolls-Royce (LSE: RR) shares have only gone in one direction and that’s upwards at speed. In the year to 16 September they shot up from 71p to around 227p, an increase of a staggering 220%.
For once, I got my timing right. I bought a small stake in the aircraft engine maker in October last year and banked a 196% gain a couple of weeks ago. I’m usually a buy-and-hold investor but I needed some cash in a hurry and that looked like the best way to raise it.
It felt to me like Rolls-Royce had gone from being oversold to overbought, and required a period of consolidation after all the excitement. I’m possibly not the only one thinking that, with the share price down 11% over the last month.
Glad I sold, should I buy?
At some point I want to buy the stock again. And this time I’ll hold on to it, if I can. Is now too soon?
I’ve been thrilled with the turnaround of the last 18 months. Rolls-Royce is the type of stock the UK needs to prove it isn’t a busted flush engineering-wise. We don’t manufacture enough these days. So it’s great that we can still make commercial and civil aviation engines, and other complex power and propulsion solutions, including for nuclear submarines.
I also think it would be brilliant if Rolls-Royce could pepper the UK with a fleet of mini nuclear reactors, as it’s keen to do.
New CEO Tufan Erginbilgic is a man with a mission. A large part of that is revamping the company’s legacy management culture in a bid to streamline decision-making and remove duplication across its civil, defence, and power divisions.
As part of this he’s cutting 2,500 jobs worldwide and pooling the engineering technology and safety segments. Rolls-Royce needs a shake-up but I’m a little sad to see that Erginbilgic is still in cost-cutting mode. I’d rather see Rolls-Royce going flat out for growth and expansion.
It has made some progress on delivering hydrogen-fuelled engines with easyJet though. And it has a growing portfolio of products and technologies after recent contract wins.
The sentiment-fuelled rally is now over, so where Rolls-Royce goes next is down to company fundamentals. Underlying first-half revenues jumped almost a third to £6.95bn. Rolls-Royce is even cash flow positive again. This means investors may be able to start thinking about getting a dividend soon.
I’ll buy on a dip
The shares do still look ridiculously expensive though, trading at more than 100 times earnings. Investors will be disappointed if revenue and profit trajectories slow.
Erginbilgic also need to boost operating margins, which are currently just 5.8%. They’re forecast to hit 9.3% next year, but markets would like them to hit 20% to compete with rival jet engine makers such as Pratt & Whitney and General Electric.
Rolls-Royce also has the distraction of a potential £350m lawsuit from investors after its 2017 bribery scandal wiped millions off its share price.
The business has been through a traumatic time, especially during the pandemic. The ship is steadied but it’s far from going full steam ahead. I think it’s too pricey to buy today. I’ll bide my time before buying its shares again.
