As the Rolls-Royce share price leads the FTSE 100, is it time to buy?

The Rolls-Royce (LON: RR) share price is beating the rest of the FTSE 100 in a very good week for aviation. Should I buy now?

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Rolls-Royce (LSE: RR) shareholders have enjoyed an unusually good week. As I check its share price on Thursday morning, I see it’s leading the FTSE 100, with a gain of 4%. Rolls-Royce has risen 14% since market close on Friday, enough to push the share price performance ahead of the Footsie, so far, in 2021. Rolls shares are up 14.3% year-to-date, with the index behind on 9.5%.

We’re still looking at a fall of more than 50% over the past two years though. But this latest progress does make me wonder if the risk level has dropped sufficiently for me to buy now.

The US is loosening restrictions on UK flyers. They still need proof of Covid-19 vaccinations, but it’s a good start. Transatlantic traffic is big business for British Airways and Aer Lingus, so that should boost owner International Consolidated Airlines. And with it, a resumption in demand for engine maintenance is also good for the Rolls-Royce share price.

IAG featured in the Sunday Times last weekend, with chief executive Luis Gallego saying:We do not see the necessity to do a rights issue and are not considering it.” On the back of that, the IAG share price has climbed 17.5% since the weekend.

Traffic lights

The UK is scrapping traffic light rules for flying destinations in October. As well as being over-complicated, they appeared to change about as quickly as real traffic lights. Let’s hope the new red list system’s more stable.

The week’s news for Rolls-Royce does seem to have been positive. And it’s a company I’ve always liked, but never bought. Is now the right time for me to correct that omission and invest while the Rolls-Royce share price is still low? However, there’s one thing I keep coming back to, and that’s valuation.

Rolls reported an earnings loss last year, so that means there’s no 2020 P/E ratio to go on. But I’m hoping the company can at least get back to 2019 earnings levels before too much longer. US plane maker Boeing has suggested world aviation won’t return to pre-pandemic levels until late 2023, or early 2024. But I’m a long-term investor, so that’s fine by me.

Rolls-Royce share price valuation

If and when Rolls does get back to 2019 earnings, on the current share price that would mean a P/E multiple of 23. And that’s based on underlying earnings — statutory EPS was negative. It’s easy to forget that Rolls was already going through a tough patch before the pandemic arrived. And then there’s rising debt.

Net debt at the 2021 interim stage stood at £3.1bn. If we add that to the company’s market-cap of £10.5bn, we get the enterprise value. That’s what it could cost to buy the whole company and pay off the debt. On that basis, I reckon we’re looking at an effective P/E multiple of around 30. It’s only a rough calculation, but that doesn’t seem obviously cheap to me.

So what will I do? I’m actually torn. I think there’s a very good chance the Rolls-Royce share price will end 2021 significantly ahead of today. But I just can’t buy into a company emerging into such an uncertain patch, on what I see as a fairly high valuation.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any of the shares mentioned. 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.

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