I keep waiting for Rolls-Royce Holdings (LSE: RR.) to miss forecasts and for the share price to tumble so I can buy cheap. But once again it hasn’t happened, as 2024 results smashed through expectations.
In early trading Thursday (27 February), Rolls-Royce shares spiked 16% to reach a new all-time high of 735p.
Key points
Rolls announced a share buyback of up to £1bn. This is the company that, in the 2020 stock market crash, had to take on billions in debt just to survive. What a turnaround!
We also have the first dividend since their suspension during the pandemic, of 6p per share. On the previous day’s close that’s a 1% yield, and a bit ahead of broker forecasts.
CEO Tufan Erginbilgiç told us: “Based on our 2025 guidance, we now expect to deliver underlying operating profit and free cash flow within the target ranges set at our Capital Markets Day, two years earlier than planned.”
The guidance includes underlying operating profit of £2.7bn-£2.9bn, with free cash flow at the same level. And that includes impacts from supply chain availability, which are expected to persist for another 12-18 months.
What next?
The CEO went on to say: “Our upgraded mid-term targets include underlying operating profit of £3.6bn-£3.9bn and free cash flow of £4.2bn-£4.5bn. These mid-term targets are a milestone, not a destination, and we see strong growth prospects beyond the mid-term.”
Company bosses do like to paint an optimistic picture. And Erginbilgiç has been among the most vocally upbeat of them. I generally prefer managers who under-promise and over-deliver… But wait, that’s actually what he’s been doing, as Rolls keeps beating expectations.
Stock market history suggests every company fails to hit targets from time to time. But for Rolls, I’ve given up holding my breath.
Underwater
Growth prospects for the aero engine market, while likely strong in the next few years, are probably fairly limited. The bigger drivers for growth that I see are defence and nuclear power.
Rolls reported a £13.3bn order intake in the year. Of that, an eight-year submarine contract with the UK Ministry of Defence is a clear highlight. The order “combines several current and upcoming contracts and underscores our unique nuclear capability“.
The Czech government picked the Rolls-Royce small modular reactor (SMR) business as a preferred supplier in September. Sweden has shortlisted it for a project too, as part of that country’s plan to be free of fossil fuels by 2045.
The SMR business is still in its early days as “first power is still planned in the early 2030s, which will be dependent on securing orders from the UK Government’s SMR procurement process“. So it’s promising, but risky.
Valuation
I still think the main risk for Rolls-Royce shareholders is in the stock’s high valuation (relative to the FTSE 100). And the likelihood of what might happen when this expectations-busting growth phase starts to slow.
It’s too rich for me. But will I be ruing more missed chances a year from now? It’s a distinct possibility.
