When will the Rolls-Royce share price slow down?

The Rolls-Royce share price has been soaring. But this Fool is yet to buy. Here he explains why and details why this may be about to change.

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Image source: Rolls-Royce plc

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The Rolls-Royce (LSE: RR) share price has rallied in the last 12 months. During that time, it’s up 146.1%. For comparison, the FTSE 100 is down 3.6% in the same period.

That’s impressive. Last year, it was the best performer on the STOXX Europe 600 index. After what had been an underwhelming few years, Rolls shareholders would have been happy to finally see the firm bounce back.

The stock is flying. I’ve been waiting on the sidelines contemplating whether to grab some shares. But I’m yet to hop on board. There’s one key reason for that.

A long-term investor

The companies I buy today I intend to own for decades. Therefore, I’m wary of short-term rallies in share prices.

Market sentiment and investor hype can push prices up, leading to spikes. But if I don’t think this is justified, then I won’t buy it.

Instead, I like to look at fundamentals. They’re the real drivers in long-term growth. Today, I can pick Rolls shares up for around 30 times earnings. That’s rather expensive, in my opinion.

A bold leader

That’s been my view for the last few months, at least. But I’m starting to warm to the stock. After all, Warren Buffett says we shouldn’t mind paying the price for a top-quality business.

When CEO Tufan Erginbilgiç took charge of the Footsie stalwart a couple of years back he didn’t shy away from laying out his bold intentions.

He vied to return the company into a “high-performing, competitive, resilient and growing” business. So far, he hasn’t done too badly in delivering his promise.

For 2023, Rolls more than doubled its underlying profit, rising to £1.6bn. Free cash flows also come in at £1.3bn.

They’re strong signs of progress. The firm has also trimmed some fat on its balance sheet. Its debt now sits at £2bn. That’s a solid improvement on the £3.3bn in 2022.

Flying hours equal profit

Erginbilgiç’s master plan seems to be paying dividends at the moment. But what’s also boosted Rolls’ performance is a rise in flying hours.

Its civil aerospace division posted a great performance in 2023. For the year, large engine flying hours were double those of 2020. They were also 80% higher than 2019.

The more planes in the air, the more money it makes. Demand for flights is set to soar this summer. That’ll be music to the ears of shareholders.

Foot on the brakes?

So, Rolls’ rise has been inspiring. But will its share price come tumbling down soon?

I’m cautious about getting dragged into the hype. But I like the look of where the business is heading. Erginbilgiç is targeting £2.8bn in operating profit by 2027. That’ll be difficult to achieve, but he’s made a good start.

Rolls has been on my watchlist for a while. But it’s safe to say I’m watching the stock’s movements now closer than ever before. If we see a dip any time soon, I reckon I’ll be using it as a chance to open a position.

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.

Charlie Keough has no position in any of the shares mentioned. 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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