If I’d purchased £5,000 of Rolls-Royce (LSE:RR) shares 12 months ago, it’s safe to say I’d be happy with my return. Today, I’d be sitting on around £14,700.
Unfortunately, I didn’t. But is there still hope for me to make some attractive gains? Or have I left it too late?
The FTSE 100 has got off to a shaky start in 2024. But Rolls has kept up its fine momentum. Even so, I’m steering clear of the stock.
A strong recovery
The pandemic took a massive toll on Rolls. Travel restrictions left the company with huge debts. It had to cut almost a fifth of its workforce as a result. For 2020, it reported a £4bn loss.
However, since then, the firm has made great strides in bouncing back. In 2023 it upgraded its earnings forecast twice. For 2024, earnings are forecasted to rise 32%.
That’s been fuelled by the work of new CEO Tufan Erginbilgiç. Since taking over, he’s implemented a turnaround plan that aims to build the firm into “a high-performing, competitive, resilient and growing” business. To date, it seems to be working.
Despite that, I still wouldn’t buy the stock for my portfolio today. But why? Well, investor hype around Rolls is clearly high. Yet where its share price has been quickly moving in the right direction, I’m cautious it may slide.
A 194% jump in a year is incredible. However, I buy for the long run. And in the short term, a stock’s performance can be heavily dictated by investor sentiment and hype. I think investors may be over-reacting and have gotten carried away.
A volatile industry
There’s also the issue of volatility. Rolls relies heavily on its civil aviation sector for revenue. And while demand for travel has soared in recent times, threats remain. For example, ongoing conflict between Russia and Ukraine, as well as in the Middle East, could harm Rolls’ operations.
Interest rates
Another factor to bear in mind is interest rates. Global rates are expected to fall as we enter the back end of 2024. This is a move that would support consumer and business spending.
But higher-than-expected UK inflation figures for December were a reminder that we’re not out of the woods yet. With the US Federal Reserve and Bank of England keeping rates on hold in their most recent meetings, it’s clear central banks won’t move rates until they feel confident that we’re edging closer to the 2% target.
That also has implications for the firm’s debt, as it makes it more costly to pay off. Its net debt currently sits at £2.8bn. That’s a fairly sizeable pile. What’s more, around 75% of this is due within the next three years.
Holding off for now
I won’t be buying Rolls shares right now. But if the stock pulls back, I may be tempted. Its full-year results are due on 22 February. I’ll be locked in to see how the market reacts to those.
As for now, I see better options out there for my portfolio.
