Wow! A little over two years ago, Liz Truss was the prime minister and sentiment surrounding the UK pulled the already-depressed Rolls-Royce share price down near 60p. Now the stock is knocking on the door of £6 a share. The rise is incredible.
So, will the Rolls-Royce share price hit £6 before the New Year and is it still attractive for long-term investors at this price?
The Santa Rally
The Santa Rally, a phenomenon where stock markets tend to rise during the last five trading days of December and the first two of January, is particularly pronounced in the UK. According to eToro’s analysis, the FTSE 100 has delivered an average December return of 2.29% since its formation in 1984, outperforming other months by 1.93%.
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As the UK stock market isn’t particularly big on growth, this represents a staggering 36% of the index’s annual returns. In theory, this Santa Rally could push Rolls-Royce over the £6 mark before the New Year. Likewise, there aren’t any technical indicators — these are markers used by traders — to suggest that the stock will lose momentum in the coming month.
Bucket loads of optimism
Rolls-Royce is a company benefiting from bucket loads of optimism. The business keeps beating analysts’ earnings forecasts quarter after quarter and industry reports reinforce the company’s long-term value proposition.
At its core, efficiency improvements and robust demand for air travel have propelled Rolls-Royce to new heights. But the business is also experiencing supportive trends in its two other profitable segments, defence and power systems.
Industry news and business reports have also pushed shares higher. This includes reports around UK’s efforts to shore up its defence supply chain, which could create lucrative contracts for the company’s advanced technology solutions. Other reports include the potential use of small nuclear reactors for data centres.
From a business perspective, there’s not much to worry investors. However, management has warned that ongoing supply chain disruptions, particularly in critical components and labour shortages, could impact its production and delivery schedules.
The company is actively working to address these issues, but risks remain.
Is Rolls exceptional in the UK?
Even those of us new to investing will recognise that US-listed stocks and American companies are typically much more expensive than their British and European peers. This is very clear is areas like banking, where UK banks trade with a significant price-to-earnings (P/E) discount.
However, Rolls-Royce is a unique case. It doesn’t have many direct peers as there are very high barriers to entry in sectors like aviation engines, defence, and power systems. But we can see that US-listed peer GE Aviation is still more expensive than Rolls on a P/E and price-to-earnings growth (PEG) basis.
I’m still optimistic on Rolls-Royce because of this discount, although I won’t add to my already sizeable position. With a PEG ratio of 1.2 — below GE at 1.43 — there’s room for growth. While Rolls-Royce is primarily listed in the UK and typically trades at a discount for that reason, there are few other options for investors seeking exposure to the high-tech manufacturing sector.
