After rising 211% in a year, is there value left in the Rolls-Royce share price?

Rolls-Royce has been the FTSE 100’s best performer in recent times. But is there still value in its share price for investors?

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Image source: Rolls-Royce plc

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The Rolls-Royce (LSE: RR) share price performance over the last 12 months has been nothing short of amazing. During that time, it’s soared a whopping 211.4%. The FTSE 100 has risen 9.1% during the same period.

After its magnificent performance last year, some believed that the stock would slow this year. That doesn’t seem to be the case.

But after its incredible rise, where does that leave investors who are considering buying some shares today? Is there still any value to squeeze out of the stock?

Valuation

There are a few ways I can measure that. One is by looking at its price-to-earnings (P/E) ratio. Today, Rolls’ shares trade on a forward P/E of 57.5. In my opinion, that’s way too expensive. The Footsie average is around 11. Peers, such as BAE Systems, trade on a forward P/E of just 20.4.

Considering that, I don’t see much value in the Rolls’ share price at the moment. I believe that the stock’s been driven higher by investors getting carried away.

In the short term, market sentiment can provide a stock with momentum and drive its price up. But over the long run, which I focus on when investing, it’s fundamentals that matter most in creating growth.

Not a write-off

But that’s not to say I’m completely disregarding Rolls. At its current price, I wouldn’t consider buying shares. However, it’s a business I’m keeping on my watchlist.

That’s because I like what CEO Tufan Erginbilgic has done since taking over. He’s streamlined the business over the last few years. Under his tenure, profits have soared and Rolls is generating free cash flow once again.

From what he described as a “burning platform” when he took over Rolls back in January 2023, he’s made good progress in his aim to create a “high-performing, competitive and resilient” business.

There was also more positive news with its latest trading update released on 23 May. In the announcement, the firm revealed that engine flying hours had recovered to 2019 levels. That should help the business continue with its recovery.

Potential dividend

There are other factors I need to account for. For example, as an investor who targets income, I must also consider the potential for Rolls to start paying a dividend again soon.

Understandably, the firm halted its payout in 2020. However, analyst forecasts have the firm paying a dividend of 2.6p per share for the year ending 31 December. By 2027, that’s expected to rise to 7.7p. Based on its current price, that works out at a 1.7% yield.

Any value left?

I really like the strides Rolls has taken since the pandemic. It’s done a brilliant job of turning itself around. But I’m not comfortable adding it to my portfolio today at its current price.

Market hype has driven the stock to new highs in recent months. But I’m also conscious that its share price could easily come tumbling down. I’ll be watching closely. If the stock recoils to a price I’m happy to pay, I’ll make my move.

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 BAE Systems and 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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