The Rolls-Royce (LSE:RR) share price might have lost some momentum in 2024, but it’s still up 7.8% since the turn of the year. Unsurprisingly, that’s better than seemingly perennially-underperforming FTSE 100, which is down 1.63% since 1 January (down 3.9% over 12 months).
I noticed several of my colleagues have gone cold on Rolls-Royce. The old bullishness has faded. So has the bull run gone too far? Should I continue to invest in Rolls-Royce?
Holding your winners
Investors have a tendency to hold on to their losing stocks for too long and sell their winners too soon. This is a common behaviour driven by psychological biases such as loss aversion and overconfidence.
I sadly fell foul of that with Rolls. I had a weighted buying price around 80p, sold around 160p, and bought again around 250p. If I hadn’t tampered with my investment I’d be up over 200% by now.
As it happens, it’s still a strong return, and I’m continuing to hold my position.
All eyes on 22 February
It’s important to recognise that this surging share price has been driven by performance. Rolls-Royce was in the dumps when Tufan Erginbilgiç took over as CEO and described the company as a “burning platform”.
Under Erginbilgiç, Rolls-Royce has performed better than almost anyone could have expected. And this has been reflected in its earnings reports, which have consistently surpassed estimates.
In addition to cash flows being much stronger than we all anticipated, the company has initiated strong guidance for the medium term and has a huge order backlog for aircraft engines, defence propulsion mechanism, and commercial power systems.
As such, all eyes are rightly on full-year results day on 22 February. Although we may have a pre-results note before this. Consensus estimates are for earnings per share (EPS) of 9.8p from underlying sales of £14.7bn.
The bottom line
Rolls-Royce is quite dependent on revenues from the civil aviation sector — despite the relative strength of its power systems and defence sectors — and with a forward price-to-earnings ratio of 32.2 times, it’s not cheap.
The thing is, investing isn’t just about this year. It’s about the future. Rolls-Royce’s earnings are expected to increase at an impressive rate moving forward, reaching 12.9p per share in 2024, and 16p per share in 2025. By my own calculations, EPS could reach 20p by 2028.
In turn, this growth rates gives it a price-to-earnings-to-growth (PEG) ratio under one — inferring the stock is undervalued.
Moreover, while I cite Rolls’ dependence on civil aviation as an issue, it really doesn’t have many peers with such an interesting, diverse, and defensive portfolio.
Fellow engine-maker GE is one of its few peers, and it currently trades at 30.1 times forward earnings — similar to Rolls. However, with a PEG ratio of 1.14, it’s less attractive than Rolls, based on earnings growth.
For me, all the evidence suggests the Rolls-Royce bull run can continue.
