Should I still be cautious about Rolls-Royce shares?

Rolls-Royce shares are flying. But is now the time for this Fool to open a position? Here, he explains why he’s more tempted than ever to buy.

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Image source: Rolls-Royce plc

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Rolls-Royce (LSE: RR) shares have been the talk of the town. It seems like every week they continue to soar. In the last month alone, they’ve jumped 16.7%. In the last 12 months, they’ve advanced 176%!

If I’d invested £1,000 in the stock back then, today I’d have £2,760. That’s not bad at all.

On 15 March, the stock hit a fresh 52-week high of 398p. While that’s exciting news for shareholders, I’m wondering if I should be cautious about opening a position now.

Too far, too soon?

The reason for that is the speed of its rise. I’ve highlighted before my worry that the market may have got carried away and that investor sentiment was driving the stock higher. If I invested with the aim of making some quick cash, I’d be laughing. However, that’s not the approach I adopt. Its share price has surged. But is it justified?

While the market’s bullish, I still have my concerns. Rolls looks expensive, in my view. On a forward basis, the stock trades at around 27 times earnings. That’s almost triple the FTSE 100 average and considerably higher than a number of its sector peers.

Set to soar?

But should I really be thinking like this? After its latest results, it’s easy to argue that the business has proven it’s out of the woods and back on track to becoming the thriving company it once was.

Last year, the firm’s underlying profit rose a whopping 143% to £1.6bn. Free cash flows were also given a major boost, while its debt was reduced by £1.3bn.

Speaking of its debt, there have been other positive signs around the stock recently. For example, its share price jumped following the news that Standard & Poor’s had given an investment-grade credit rating to Rolls’ debt. That’s the first time in almost four years.

It raised its rating from BB+ to BBB- due to a stronger than anticipated performance in 2023. This upgrade comes off the back of CEO Tufan Erginbilgiç’s actions since taking over. He’s been tenacious in implementing changes to Rolls’ structure and business model.

He’s taken a tougher stance on contracts, avoiding unprofitable deals. Alongside that, he’s driven a cost-cutting programme that’s seen the firm let go of thousands of staff.

What I’m doing

So where do we go from here? I’m certainly more tempted to add Rolls-Royce to my portfolio than I was a few months ago. But I’m still anxious that we may see the stock recoil. Investors will have high expectations for the business going forward. Any sign of a slowdown in growth could panic some shareholders.

It’s a tough one. I’ve been sitting on the sidelines waiting for a chance to get in. But by doing so, I’ve been missing out on potential gains. I like the direction Rolls is moving in, especially with Erginbilgiç at the helm.

If we see a dip in its share price any time soon, I think I’ll be making a move and opening 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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