The continued rise of the Rolls-Royce (LSE:RR.) share price was arguably the biggest investing story on the FTSE 100 during 2023.
The engineering giant started the year at 94.76p per share and ended it at 297.8p. That’s a stunning 214% year-on-year increase.
Rolls-Royce’s highest-ever share price of around 442p was printed almost exactly 10 years ago. If the business can replicate 2023’s performance it would smash that record and end the year at 948p.
This looks like a tall order! But even a more modest rise of 47% would see the company take out that high set in early 2014.
Can Rolls do it? And should I buy the FTSE firm for my UK shares portfolio today?
Solid travel sector
A strong rebound in the airline sector has underpinned Rolls’ soaring share price since the dark days of the pandemic. This should be no surprise given the importance of its plane-servicing operation to group profits.
Just over 60% of the company’s underlying operating profit came from its Civil Aerospace division in the first half of 2023.
Encouragingly the global aviation sector’s recovery is tipped to keep trucking on, too. The International Air Transport Association (IATA), for instance, has predicted total air passenger numbers will hit 4.7bn in 2024. This would beat the record 4.5bn people that flew in 2019.
There’s a chance that passenger numbers could even beat this forecast if — as many expect — major central banks like the US Federal Reserve start chopping down interest rates.
Transformation measures
Strong market conditions don’t tell the whole story for this recovery stock, however. Investors have also been impressed by the early success of the company’s multi-year transformation programme.
Measures such as widescale cost-cutting and commercial optimisation helped underlying operating profit soar to £673m between January and June 2023. This was up from £125m a year earlier.
Chief executive Tufan Erginbilgiç isn’t taking his foot off the gas, either. In October, he announced plans for another 2,000-2,500 role reductions. A month later, he also said a further £1.5bn worth of assets could be divested. News of additional self-help measures would likely boost investor confidence even further.
Should I buy Rolls shares?
But while Rolls could rise further in 2024, I’m not convinced to buy the shares for my portfolio.
The firm’s share price surge leaves it trading on a fatty premium. Today, it trades on a forward price-to-earnings (P/E) ratio of 24.1 times, more than double the FTSE 100 average of 11 times.
This reflects market expectations that trading news from the company will remain impressive. The danger for investors is that anything else could see shares slump from current levels.
A sudden downturn in the travel industry is one reason why the business could run into trouble. Tough conditions for the global economy could also create fresh issues at its Power Systems unit. Finally, there are enduring supply chain problems and inflationary pressures across the aerospace sector.
I’m also concerned about the high levels of debt Rolls still has on its balance sheet, and what this could mean for future dividends. The market is now expecting shareholder payouts to return this year, so signs to the contrary could see investors head for the exits.
Unfortunately Rolls-Royce carries too much risk for my liking. So I’d rather search for other FTSE 100 shares to buy.
