At times last year, it seemed like the Rolls-Royce (LSE: RR) share price couldn’t stop. It far outpaced any of its peers in the FTSE 100. In fact, it was the best performer on the STOXX Europe 600.
But with its share price hitting the brakes, is now the time for investors to consider buying the stock?
Slowing down
When I say the stock has slowed down, that may sound odd. After all, it has still risen an incredible 39.9% so far in 2024.
However, the last month hasn’t quite delivered the impressive returns that shareholders have become used to. During that time, it has fallen by 2.8%.
Reason behind the fall
After its meteoric rise, there are a few reasons why Rolls has stagnated in the last month or so.
The most recent (and arguably the main) reason is the fact the business is facing a month of industrial action from workers in its nuclear submarine division. The dispute is over pay, with around 90% of workers part of the GMB Union backing the action to strike. Resolving this issue could be costly for Rolls. Clearly, that has spooked investors.
Time to buy?
But then again, that seems like a short-term concern. For an investor like myself, who buys for the long run, could this be an opportunity?
Well, maybe. The business is clearly heading in the right direction. Since the pandemic, it has been flying.
Under CEO Tufan Erginbilgic, Rolls has made great efforts to streamline. It has cut costs and improved efficiency. Last year, underlying operating profit rose 144% to £1.6bn.
Erginbilgic has plans to turn it into a “high-performing, competitive and resilient” business. So far, he looks like he’s on track to achieve that.
In the years ahead, Rolls is also set to benefit from an uptick in defence spending across the globe. For example, in February, the UK announced that its defence industry spending surpassed £25bn for the time ever.
I’m steering clear
But even with those positives, I’m still not keen on the stock right now. I think it looks overpriced.
Today, it trades on around 28 times forward earnings. That looks expensive compared to the Footsie average (11). It’s also more than its rivals such as BAE Systems (20).
I reckon the stock has been pushed too high by market hype. In the short term, investor sentiment can drive a share price up. But in the long run, it’s fundamentals that are the real growth drivers.
A waiting game
I like Rolls and I think it has plenty of potential. I’m impressed with the work Erginbilgic has completed since taking over the reins.
But even despite its recent stall, I still think it looks too expensive. Therefore, I’m happy to wait and see if the stock drops to a price I’d be more comfortable paying.
My biggest concern is that any signs of a slowdown could see its share price pulled back. If it does, I’ll make a move. Until then, it’s remaining on my watchlist.
