Rolls-Royce (LSE:RR) shares are up an astounding 161.7% over 12 months. It’s among the most impressive turnarounds I’ve seen. However, if we take a longer view, we can see that the engineering stock is actually down over five years.
In fact, the company, which makes the majority of its revenue in the civil aviation sector, trades at a 21% discount versus where it was five years ago. So, if I had invested £1,000 in Rolls-Royce shares in late 2018, today I’d have £790, plus some very limited dividends.
In 2018, I’d have received 11.7p in dividends per share and in 2019 I’d have received 4.6p per share.
Rolls-Royce has something that’s in short supply on the FTSE 100. And that’s momentum. The stock, having pushed downwards towards £2 a share, has rebounded in recent weeks.
The catalysts for this appears to have been the announcement that Rolls-Royce will be slashing jobs, again, as part of a cost-cutting programme aiming to make Rolls a leaner and more profitable company, as well as an upgrade from Barclays.
The company said it will cut up to 2,500 jobs worldwide as part of a plan to streamline the organisation. This roughly represents 6% of the 42,000 people employed by the engineering giant.
Rolls noted that the engineering technology and safety segments will come together as a single team responsible for product safety, engineering standards, process, methods and tools.
Meanwhile, Barclays raised its stance on engineering giant Rolls-Royce from ‘equal weight’ to ‘overweight’. The bank has hiked its price target for the tock from 239p to 270p. At the time, Rolls was trading at 202p.
Worth the price tag?
Valuation metrics can help us understand how a company ranks compared to its peers. So, here’s how Rolls compares against its peers.
I actually looked at the below data last week, but since then we’ve seen the Rolls share price surge and the earnings per share (EPS) forecast raised for 2024 and 2025.
|EPS forecast (p)||7.17||9.95||13.01|
|P/E at current share price||31.9||23.7||18.1|
Rolls’s main competitor in the civil aviation space — General Electric — has a very different forecast, but also a much cheaper P/E in the near term.
|EPS forecast (c)||7.68||5.22||6.7|
|P/E at current share price||14.5||22.4||16.6|
The two companies valuation metrics converge after three years. Assuming Rolls is on a better earnings trajectory, on a forward basis for 2026, the British engineering giant may represent better value.
There are certainly risks involved in investing in Rolls. For one, the company could miss out on a huge tailwind in civil aviation due to its abandonment of the single-aisle market a decade ago.
Nonetheless, it remains an attractive investment opportunity for me. In fact, Rolls’s forward PEG ratio stands at 0.46. A ratio below one normally suggests a company in undervalued. By comparison, General Electric has a forward PEG of 1.57.
This suggests it’s very possible that the Rolls share price can continue to grow.