1 growth stock I’d consider before Rolls-Royce

The UK’s favourite jet engine manufacturer has skyrocketed lately but there may be more potential in this undervalued growth stock.

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If there’s one growth stock that every UK citizen knows, it’s Rolls-Royce — the stock that’s taken over the FTSE 100 in recent years. Up over 200% in the past year alone, this aerospace and defence giant has been keeping the UK stock market afloat. 

But what goes up must come down, right?

Parabolic growth can’t go on forever and I think Rolls’ rally is tapering off. It’s now time to look for the next UK stock that’s primed and ready for take off.

And I think this is it

Since 1848, this company has provided insurance and financial services to customers in the UK and abroad. In the past two decades, it’s made serious inroads into emerging markets in Asia and Africa, where I believe a wealth of untapped opportunity lies.

However, it’s been on the wrong end of the stick for several years now, down 56% since the summer of 2021. It’s a struggling stock if I’ve ever seen one but it’s also a company with a long history of excellent performance and wealth creation. For example, in the last five years of the 90s it grew 200%, and between 2008 and 2018, the share price increased 400%.

Yes, I’m talking about the UK’s largest life insurance firm, Prudential (LSE: PRU).

In 2021, it demerged from it’s asset management arm M&G and US business Jackson. This was to focus resources on the regions where it’s most profitable. But initially the gamble didn’t pay off as slow growth in Asia throttled profits.

Making a comeback

Looking at its latest FY 2023 earnings report, it’s evident things are improving. Profit after tax came in at $1.7bn, after a $997m loss the year prior, and new business profit is up 45%.

Now bolstered up with $4bn in excessive capital to play with, Prudential has announced a $2bn share buyback programme. This may alleviate some losses incurred by long-suffering shareholders but is it too little too late?

What the fat cats think

Buybacks always catch the attention of brokers as they basically guarantee a huge inflow of cash into the stock. And this time is no exception. Earlier this week both Deutsche Bank and Bank of America put in ‘buy’ ratings on the stock. JP Morgan went ‘overweight’ and Exane gave it an ‘outperform’ nod.

There appears to be a general consensus among analysts that the stock will rise 74% in the next 12 months. Even the most bearish of analysts think it’ll grow by at least 30%. Of course, analysts can get it wrong.

A challenging road ahead

Prudential is by no means in the clear yet. Earlier this month, Jefferies estimated a $1bn buyback would boost returns to 6% — still a fair way below the UK life insurance sector average of 9%. At $2bn, it might stretch returns more in line with the sector but challenges remain.

Economic headwinds in China threaten to suppress one of its largest markets — not to mention uncertainty around the upcoming UK election. Even with things looking up, return on equity (ROE) is expected to be below 15% in three years, which is low.

Overall, I think Prudential’s low price represents a good opportunity but its recovery has only just begun. If all goes well, I think it could be the UK’s next big success story. But make no mistake – many obstacles remain.

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.

Bank of America is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Mark Hartley has positions in Rolls-Royce Plc. The Motley Fool UK has recommended M&g Plc, Prudential Plc, 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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