Up 175% in 12 months: why Rolls Royce shares are still on my buy list

Our writer has been watching Rolls- Royce shares scream 177% higher in the last year. Here’s why he thinks they have further to run in 2024.

| More on:
Smart young brown businesswoman working from home on a laptop

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.

Rolls-Royce (LSE: RR.) shares have been a phenomenon in the last 12 months. The UK engineering group has seen its market value soar 176% higher in the last year to £33.7bn, or 390p per share.

That’s an incredible rebound from one of Britain’s most iconic companies. To put it in perspective, the FTSE 100 has climbed 4.3% over that same period.

Some investors may be calling the top for Rolls-Royce shares given the recent gains. I’m more bullish on the British manufacturer in 2024 for a few reasons.

Money, money, money

Shares in the UK aerospace group charged higher after its February full-year earnings release.

Rolls-Royce posted a £1.6bn underlying profit in 2023 – more than 200% than its £652m effort in 2022. It also beat analyst expectations across all of its divisions.

This was music to investors’ ears, with the company’s shares soaring 8% on 22 February.

It’s not just the underlying profits that caught my eye.

Any value investor worth their salt will have heard that “cash is king”. The British group’s revitalised management team is focused on generating cash flow.

I wouldn’t expect Rolls-Royce to resume paying dividends until it has gained an ‘investment grade’ credit rating. Fitch Ratings has the company one notch below that at ‘BB+’  with a ‘Positive’ outlook.

However, I do like the pathway to dividends that I could see forming based on a strong operational foundation.

Executing its strategy

Another reason I like Rolls-Royce at its current 13.6x price-to-earnings (P/E) ratio is a clear strategy backed by good execution.

The company is going from strength to strength, and is capitalising on revenue opportunities while slashing costs. I think a doubling of its underlying operating margin from 5.1% in 2022 to 10.3% in 2023 shows that it’s working.

Monday’s Derby expansion announcement, increasing capacity to deliver over 40% more new engines per year from 2025, is just the latest example of its growth strategy in action.

Favourable macro environment

Rolls-Royce has a few divisions, spanning: civil aerospace; power system, and defense. This gives the company a few different levers for growth.

Things are more uncertain around the world than they have been for quite some time with rising tensions. Couple that with more than 40% of the world’s population being eligible to vote in 2024, and it’s a tense world at present.

Increased geopolitical risks have traditionally been associated with higher defence spending. Deglobalisation, meaning reduced international trade and collaboration, isn’t a reality just yet but remains a risk.

In my view, this creates higher potential spending on defence, and therefore opportunities for Rolls-Royce to deliver across critical areas like power systems, defence and aviation.

Weighing it all up

I’m wary of the risks to the share price as well.

It wasn’t so long ago that the company was under pressure to deliver these costs. A strong share price run has been good for investors, but also means a lot is riding on these current transformation and growth initiatives.

Reputation risk, supply chain disruptions and other unforeseen challenges could see investors take their profits and run for the hills.

I’m wary, but personally fairly bullish on the UK group’s share price right now.

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.

Ken Hall has no positions in any of the companies mentioned in this article. 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 »