Over the past few months, Rolls-Royce (LSE:RR) shares have displayed far less oomph. I wouldn’t say they’ve stagnated — they’re still up 99% year to date, after all. Yet with a modest 3% rise since mid-August, they’ve definitely plateaued.
To be fair, it’s been pretty quiet on the Western Front recently, so the FTSE 100 stock has lacked a meaningful catalyst. But we might soon get one in the shape of the company’s Q3 trading update on Thursday (13 November).
Here’s what shareholders (including myself) should expect to see.
Supply chain crunch
In July, the engine maker reported that first-half underlying revenue rose 11% to £9.1bn. However, underlying operating profit surged 50% to £1.7bn, smashing market expectations. Growth was strong across the board in all three divisions.
For the full year, analysts expect around £19.6bn in revenue and as much as £3.3bn in operating profit. The latter would represent robust 32% growth. Any indication in the Q3 report that the firm was on track to exceed these figures would likely send the share price soaring.
As far as we can tell, aircraft utilisation rates remain high, along with strong demand in defence and AI data centres (which benefits Rolls-Royce’s Power Systems unit). Engine flying hours could end the year as high as 115% above 2019 levels.
On the other hand, we know that the global supply chain crunch continues to be a major challenge. This includes materials and parts delays, labour shortages, long repair waits, and rising maintenance costs.
Global airlines are on the hook for more than $11bn in extra costs this year from supply chain disruptions, according to the International Air Transport Association.
Indeed, I was reading recently that private jet owners are now leasing out their aircraft engines. This must be the first time rich folk have made such returns from these high-cost assets!
Personally, I’m not expecting anything out of the ordinary in the update. But the supply chain issue is worth monitoring. It’s been a while since the stock sold off heavily, but any cautious commentary from management around this could spook investors.
Attractive end markets
I first bought Rolls-Royce shares in mid-2023. One thing I found attractive about the firm was its defence exposure (about 25% of group revenue).
It designs and manufactures jet engines for military aircraft, as well as nuclear propulsion systems for submarine fleets. So it’s perfectly positioned to capture some of the huge military spending almost certain to take place in Europe over the next decade.
Another thing I thought was undervalued was its small modular reactor (SMR) division. Back then, it was still largely viewed as a highly speculative venture that might pay off one day in the 2040s. Some thought no-nonsense CEO Tufan Erginbilgic would even sell it off.
However, since then, the SMR unit has been chosen as the sole provider in the UK and won a competition in the Czech Republic to sell up to six units. Management says revenues will start by the end of 2025, with positive cash flows throughout.
Not selling
I have no intention of selling a single share. But with Rolls-Royce trading at 35 times forward earnings, while offering little in the way of income, I think there are other better opportunities for any new money of mine right now.
