What a difference a year makes. Last November, I could have bought Rolls-Royce (LSE: RR) shares for only 89p. The company then went on a tear and the share price soared all the way up to today’s price of 246p. This outrageous run marks the biggest return from any FTSE 100 stock over the period.
In fairness, the Footsie hasn’t offered great returns recently, and as stocks in this country continue to stutter, I’m pleased to see at least one big name bucking the trend. I’m even more pleased that I spotted how cheap the shares looked and bought in for most of the upswing.
So now we have a company on a more sure footing that has just surged 189%. Is Rolls-Royce still cheap at this price? Could the firm go on another similar run? Or has it moved into overbought territory and should be avoided? Let’s take a look at these questions.
189% surge
Let’s begin by picking apart that 189% rise. One reason for the surging share price was that it was at a low ebb last year. It dropped to less than £1 after the pandemic grounded planes and the firm’s engines weren’t in use or in need of maintenance. So, as Covid restrictions ended and flights resumed, it was always likely that the battered share price would see a turnaround. But that isn’t the only reason.
New CEO Tufan Erginbilgic has undertaken a raft of efficiency improvements. The results from these changes likely surprised even him as Rolls smashed expectations in the first half. While this streamlining hasn’t been enough yet to return the firm to profitability, the future looks a lot rosier than it did a year ago.
My concern, then, is that we might be near the top. It’s easy to say in hindsight, but that 89p share price did look cheap. Now, flights are running as normal and the streamlining has mostly been implemented. What’s going to spark future growth here?
The future
Well, the prospects look bright to me. A dividend payment looks on the way next year. The firm was a reliable dividend stock until the pandemic hit, and the consensus forecast of a 1% dividend yield for 2024 looks small but promising.
The company’s order book looks strong too. Recent orders include Air India purchasing engines for its new Airbus A350 fleet and the US Air Force replacing the engines in its B52 bombers. The firm doesn’t sound short on customers.
And in the longer term, Rolls-Royce’s engineering expertise might be useful in manufacturing SMRs – like small nuclear power plants – to create clean, green energy. The firm has a £200m commitment from the UK government and is in talks with other nations too, although I will add that current plans involve building the first one no earlier than 2028.
In all, I like the direction the company is going. It’s not the bargain it was 12 months ago, but with growing earnings and in-demand products, the shares look cheap. I have a position already but I may add to it soon.
