Is the Rolls-Royce share price set for a correction?

After the Rolls-Royce share price has taken off, this Fool is concerned about a market correction. But should he really be worried?

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Image source: Rolls-Royce plc

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The Rolls-Royce (LSE: RR) share price has soared. But I’m worried it may recoil.

Impressive performance

The aviation behemoth has been on a tear. Last year, it was one of the best stock market success stories out there. It was the strongest performer on the STOXX Europe 600. If I’d invested £5,000 in the FTSE 100 business at the beginning of 2023, today I’d have around £20,750.  

That’s nothing short of amazing. I was conscious that Rolls would slow down this year following a skyrocketing 2023. So far, I’ve been proved wrong. Year to date, it’s climbed 43.4%.

Cause for concern?

But I’m cautious. And there’s a part of me that thinks we could be about to see a market correction. The stock’s growth spurt has been impressive. My main concern is whether it’s sustainable.

The stock has gained plenty of traction lately. Yet while in the short term investor sentiment can be heavily influential, in the long run, it’s fundamentals that drive share price performance.

Forecasts for this year have it trading at around 28 times earnings. To me, that looks expensive. And there’s the argument to be made that this sort of reading could spark a price correction. What I don’t like the idea of is investing now and getting stung.

Look at the positives

That said, maybe it won’t be the case. After all, looking at its performance of late, it’s easy to see why sentiment around the defence giant has picked up.

I’ve been tracking Rolls’ rise for a while. One reason I’ve held off from joining the wider market and snapping up some shares is due to its debt issues.

However, that could no longer be an issue. Last month Standard & Poor’s gave an investment-grade credit rating to Rolls’ debt, raising it from BB+ to BBB-. That’s already after Moody’s and Fitch upgraded their respective ratings for the business.

That’s just the tip of the iceberg when considering the positive momentum Rolls has gained recently. CEO Tufan Erginbilgic has been steering the company forward as part of his overhaul strategy.

He has cut costs, boosted profits, and increased free cash flow. From what he once described as a “burning platform”, Rolls has made a magnificent turnaround.

Ambitious plans

Going forward, he doesn’t plan on slowing down. By 2027, he’s vying for as much as £2.8bn in operating profit.

There’s reason to believe Rolls can achieve that. Its civil aviation sector should continue to be provided with a boost as demand for flights rises. It’ll also benefit from an uptick in government defence spending given the current geopolitical landscape.

My move

Rolls has been on my watchlist for some time. In all honesty, I’m torn on the stock.

It still has £2bn of debt on its books, which is something to keep in mind. But if it keeps up its impressive performance, there’s no reason to believe it can’t keep rising.

However, the market correction issue persists as a threat. And the fact that I’m currently on the fence about the stock tells me all I need to know. I’ll be holding off for now. If its price falls, I’ll reassess.

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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