If I’d invested £1,000 when the Rolls-Royce share price bottomed out, here’s what I’d have now

The Rolls-Royce share price bottomed out in October 2022 as political challenges put further pressure on the already struggling stock.

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

When the Rolls-Royce (LSE:RR) share price hit 66p back in October 2022, I was a little worried and my conviction did falter slightly. However, I didn’t sell any of my holding until the FTSE 100 stock reached 150p. More recently, I’ve been buying the stock despite the share price pushing higher and higher.

One strong investment

Since bottoming out, Rolls-Royce shares have surged 486%. That means a £1,000 investment made at that price would now be worth £5,860. We can all dream that we were part of a trade like this. But sadly, it’s always easier with hindsight.

Nonetheless, there were signs. In October 2022, Morgan Stanley said that Rolls-Royce was “the clearest example of mispricing” in its coverage. But other brokerages weren’t so bullish and broad investor sentiment wasn’t strong.

Fast forward six months and Rolls-Royce was trading around 150p a share. However, it wasn’t clear that Rolls would push higher. The company had beaten analysts expectations for just one quarter, and even the more bullish analysts, including UBS, admitted Rolls could still fall.

As 2023 went on, and as Rolls-Royce kept beating earnings estimates, it became clear that the engineering giant’s share price would go much higher. And this is when I stopped selling my holdings and started buying.

In the below chart we can see how the rise in the price-to-sales ratio has been more subtle than the rise in the share price. This demonstrates that improved business performance in the near term has also driven the bull run.

Created at TradingView

More tailwinds

It’s one of the most impressive turnarounds I’ve ever seen. But just because its up 486%, it doesn’t mean the stock can’t go higher. In fact, momentum is actually one of the best indicators of forward performance.

However, momentum can’t be sustained forever without an improving business. Thankfully, all of Rolls’s business segments — civil aviation, defence, and power systems — are benefiting from considerable boosts, and this has contributed to a very bullish medium-term target.

These supports are evident in the civil aviation business. In the near term, Rolls has a backlog of around 1,400 engines — equivalent to around three years production at current rates. That size of backlog provides investors with plenty of confidence.

And looking further ahead, Airbus has forecasted that the aviation industry will require more than 40,000 new aircraft over the next two decades.

While that means at least 80,000 new engines, the majority of these new aircraft are expected to be narrow body. With Rolls leaving the narrow body market a decade ago, there’s a risk the firm will be left behind.

The bottom line

Rolls-Royce is no longer a clear example of mispricing as it was described 18 months ago. However, just take a look at these forward price-to-earnings ratios. It’s certainly not expensive given the growth it is expected to deliver. I remain confident this stock will go higher.

2024202520262027
P/E22.218.419.216

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.

James Fox 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.

More on Investing Articles

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

Investing freedom — but inside a pension

Strapped consumers might be cutting back on investing, but they’re still keeping up their pension contributions. The only problem? A…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Forget gold! I’d rather buy these 3 FTSE high-yielders in a Stocks and Shares ISA

Gold looks like a risky investment to me as the price hits an all-time high. I'm ignoring the fuss to…

Read more »

Young female business analyst looking at a graph chart while working from home
Growth Shares

This 55p UK stock could rise more than 300%, according to a City broker

This UK stock has fallen from above 800p to below 60p. But analysts at Citi believe it’s capable of a…

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

I think this FTSE 250 trust has all the right ingredients to lock in long-term profits

Today I'm examining the prospects of a private equity investment trust on the FTSE 250 that caught my attention recently…

Read more »

Young black man looking at phone while on the London Overground
Investing Articles

2 under-the-radar UK shares investors should consider snapping up

Two UK shares have caught the eye of our writer. She explains why investors should be taking a closer look…

Read more »

Investing Articles

Are these 2 ultra-high-yielding income stocks a good buy for me?

These two income stocks often split the debate amongst investors. So what does our writer think of them as potential…

Read more »

Senior woman potting plant in garden at home
Investing Articles

5% yield! This dividend stock could be great for my retirement

Our writer explains why this dividend stock appeals to her as she’s investing to build wealth to enjoy in the…

Read more »

A young Asian woman holding up her index finger
Investing Articles

I’d aim for a second income of £1,000 a month with this super-reliable dividend stock

I think a great way to build a second income stream is by investing in dividend stocks via a Stocks…

Read more »