Should I buy, sell, or hold my Rolls-Royce shares at £3.50?

This Fool considers what he should do with his Rolls-Royce shares following the FTSE 100 company’s excellent full-year results last week.

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At the start of 2024, I’d have taken a 20% rise in the value of my Rolls-Royce (LSE: RR) shares this year.

After all, last year’s incredible 221% rise made it the top-performing stock in the pan-European STOXX 600 index. It was highly unlikely to repeat a similar triple-digit feat again.

However, boosted by the recent release of the company’s excellent full-year results, shares have already advanced another 19.6%. And we’re not even in March!

So, is it time for me to cash in, sit tight, or greedily gobble up more Rolls shares? Here’s my view.

Turnaround in full swing

It’s rare that a FTSE 100 company undergoing a turnaround performs so strongly so quickly on nearly every metric. Yet that’s what Rolls-Royce is demonstrating, as shown in its annual results published on 22 February.

Revenue increased 22% year on year to £16.49bn, which puts the top line back to pre-pandemic levels.

Underlying operating profit surged almost £1bn to £1.6bn, a 143% increase and higher than the average analyst forecast (£1.4bn). Free cash flow reached a record £1.3bn.

I found the underlying operating margin expansion of each division very impressive.

20232022
Civil Aerospace11.6%2.5%
Defence 13.8%11.8%
Power Systems10.4%8.4%
Group10.3%5.1%

Around £150m of cost efficiencies were delivered and net debt fell to £2.0bn from £3.3bn at the end of 2022.

For 2024, the firm is guiding for underlying operating profit of £1.7bn to £2bn. By 2027, it is targeting operating profit of up to £2.8bn, with margins as high as 15%. These targets don’t look far-fetched to me.

Other thoughts

One small gripe I have is the dividend. This was cancelled back in 2020 and has yet to return.

When will it come back?

Well, management said it’ll be when the firm is “comfortably within an investment grade profile and the strength of our balance sheet is assured“.

So we don’t know, though shareholders are unlikely to get too pushy while the share price is performing so strongly. Still, with rising free cash flows, I’d expect a return pretty soon, possibly next year.

Turning to risk, I do see things that could derail the share price momentum. These include armed conflicts resulting in closed or restricted airspace, supply chain challenges and a return of inflationary pressures.

My move

Despite these risks, however, I remain bullish. Rolls’s key civil aerospace division is enjoying a strong recovery in international travel. This is set to continue with large-engine flying hours expected to grow to 100%-110% of pre-pandemic levels this year.

Meanwhile, in December, a deal was signed between Airbus and Turkish Airlines that includes 70 new A350 aircraft powered by Rolls-Royce Trent XWB engines.

Indeed, orders for new large engines have reached a 15-year high. I find this ongoing commercial momentum highly encouraging.

Additionally, the defence unit is primed to secure more contracts amid escalating global tensions.

Finally, I note analysts have been boosting their price targets following the strong results. The consensus price target for the next 12 months now sits at 400p.

Given all this, I’m definitely not selling. However, with the shares trading at a premium 26 times forward earnings, I’m wary of topping up. So it’s a hold from me until things change.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ben McPoland has positions in Rolls-Royce Plc. The Motley Fool UK has recommended Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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