With UK shares disappointing, it’s nice to see one British name performing well. And that might be understating it for Rolls-Royce (LSE: RR) shares.
After the pandemic, the engine maker’s shares fell to 35p at one point. This looked low in hindsight, but I don’t think anyone expected the outrageous surge that followed.
Let’s say I was wise (or brave) enough to buy £1,000 of the shares then. I wouldn’t have received any dividends since, but I would have enjoyed watching my shares rise to 291p as I write.
Best performer
My £1,000 stake would now be worth £8,314. Not bad. Rolls-Royce is closing in on ‘10-bagger’ status and is the FTSE 100’s best performer over the period.
In fact, this terrific surge puts it among the best performers worldwide. Its rise mimics those of companies surfing the wave of a technological revolution like Nvidia.
So what’s going on with Rolls-Royce? How has it managed such an incredible performance? And looking towards the future, is it a buy now? Or are we looking at an expensive and overbought stock?
The impact of Covid-19 can’t be ignored. When your income comes from making planes fly, a global pandemic isn’t good for business. A big fall in revenues led to the share price dropping to a 20-year low.
Share price
So part of the story here is that investors were panicking. As the pandemic was in full flow, the shares fell below their true value. And the share price fell below 40p for only a couple of days.
But a raft of efficiency improvements has pushed the shares higher too. This streamlining had an impact on cash flows quicker than anyone expected and the firm smashed Q2 expectations this year.
And perhaps the best reason to like the company is that its engineering is simply top-notch. Governments and airlines across the world are placing orders. The use of its engines in Airbus planes is likely to be a strong long-term tailwind, especially as demand grows.
And it’s not easy for competitors to start making competing engines either. Rolls-Royce has what Warren Buffett would call an excellent ‘economic moat’. This kind of advantage provides a lot of safety and is something every investor should prize.
Forward earnings
A company that sells great products is always a candidate for a good buy, but the stock has already gone up nearly 10 times. We can call it a good company until the cows come home, but are we looking at a good entry point?
Well, the firm trades at 25 times forward earnings. That’s expensive by UK standards. The FTSE 100 average is only 11.
On the other hand, its valuation is in line with its foreign competitors. I hold the shares already and do see room for Rolls to push higher in the near future.
