Well, it turned out that I was right about Rolls-Royce (LSE: RR). I had previously written that the already-soaring Rolls-Royce share price might go even higher if the aeronautical engineer announced it was performing well and raised its targets yet again. Hey presto, in its interim results over the past week the company did just that. The Rolls-Royce share price jumped to a new all-time high.
Its rise has been staggering. Up 80% already this year, the FTSE 100 share is now 1,234% higher than five years ago.
Compare that to the 55% gain in the index over that period and the scale of Rolls’ achievement comes clearly into view.
I have missed out on the recent gains after selling my Rolls shares a while back. Might now be the time to add them back into my portfolio?
Strong business performance
The share price jump did not come out of nowhere.
For the first six months of the year, Rolls reported a pre-tax profit of £4.8bn. That represented a massive jump from £1.4bn for the equivalent period last year. The company’s own measure is underlying pre-tax profit, which came in at £1.7bn. That was much smaller than the statutory figure, but still significantly higher than the prior year figure of £1.0bn.
Either way, Rolls’ profitability leapt. In the company’s own words, the period saw “significant year on year improvement across all key financial metrics”.
But the Rolls-Royce share price did not leap to a new all-time high just because of strong performance to date, some of which I think was already priced in. Part of the surge reflected what I had previously identified as a possible driver for the share price – another hike to the company’s performance targets.
It lifted this year’s underlying operating profit goal from £2.7bn-£2.9bn to £3.1bn-£3.2bn. Free cash flow for the year is now forecast to come in at £3.0bn-£3.1bn, up from £2.7bn-£2.9bn previously.
This company’s on fire!
I must admit, I am impressed. Under its current management, Rolls-Royce has not only set challenging financial targets, it has also been able to deliver on them – and raise them.
Can it keep doing so? The wind is in Rolls’ sails. As its results demonstrated, civil aviation demand is high both for initial sales and servicing. Power systems demand is also high, with revenues in that division growing by a fifth year-on-year.
Meanwhile, while the firm’s defence division reported year-on-year revenue growth of only 1%, demand from Western governments is high and I expect that business to grow more in coming years.
Still, the surging Rolls-Royce share price means the firm now commands a market capitalisation of £90bn. To me that looks high. The company’s performance has transformed – but some of its underlying market dynamics have not.
In the key civil aviation market, we know from experience that a sudden unexpected event like a pandemic or terrorist attack can see demand collapse overnight. I do not think that risk is reflected in the current Rolls-Royce share price so will not be investing.
