MENU

Why I believe the Rolls-Royce share price is now too cheap to ignore

Image source: Getty Images.

The last year has seen the Rolls-Royce (LSE: RR) share price decline by around 7%. That’s a disappointing performance and comes at the same time as the FTSE 100 has recorded a gain of 3%.

However, this means that the stock now appears to offer better value for money than it did 12 months ago. As a result, it could be worthy of a closer look alongside another growth stock which seems to offer a wide margin of safety.

Improving outlook

The performance of Rolls-Royce in the last five years has been very mixed. The company has recorded earnings growth in just two of those years, with its strategy having evolved during that time to provide a brighter growth outlook.

For example, it has conducted a rationalisation of its asset base. This has helped to provide greater efficiency and a stronger focus on its core operations. It’s also invested in new products, while seeking to make its business simpler. Efficiency gains from cost reductions also seem to be having a positive impact on its financial prospects within what continues to be a relatively mixed operating environment.

Investment potential

With Rolls-Royce increasing its earnings by 34% in the previous financial year, it seems to be making progress with its turnaround programme. It currently trades on a price-to-earnings growth (PEG) ratio of 0.3, which suggests that it offers a wide margin of safety.

Certainly, the prospects for the world economy remain uncertain. However, with defence spending set to increase across the developed world, trading conditions for the company may improve to some degree. And with what seems to be an evolving strategy, its growth potential means it could merit a higher valuation than at the present time.

Impressive outlook

Also offering the potential for improving profitability over the medium term is designer, manufacturer and distributor of innovative flooring, Victoria (LSE: VCP). The company announced on Wednesday that it plans to improve the efficiency of its underlay manufacturing process in Australia by closing one of its two plants. This comes after the rationalisation of its UK manufacturing footprint, which has thus far been successful.

The company has also announced that trading in the first two months of its financial year has been impressive. Like-for-like (LFL) sales have moved 3% higher, which suggests that the business is on track to deliver on its financial outlook.

With Victoria trading on a PEG ratio of 0.4, it seems to offer good value for money. Although the company is experiencing a period of major change as it seeks to deliver on its post-acquisition reorganisation, its long-term prospects appear to be bright. As a result, it could deliver strong share price growth performance, with a wide margin of safety suggesting that now may be a good time to buy it.

Capital Gains

In the meantime, one of our top investing analysts has put together a free report called "A Top Growth Share From The Motley Fool", featuring a mid-cap firm enjoying strong growth that looks set to continue. To find out its name and why we like it for free and without any obligations, click here now!

Peter Stephens owns shares of Rolls-Royce. The Motley Fool UK has no position in any of the shares mentioned. 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.