Rolls-Royce (LSE:RR.) shares have been a stellar investment in 2023. The aerospace and defence business delivered excellent financial results for FY22, which sent the share price skyrocketing. So far, its gains are unmatched by any other FTSE 100 company.
Fortunately, I invested in the stock before the good news was released and I’m currently sitting on a healthy profit.
So, how much would a £1,000 investment in Rolls-Royce have delivered since the beginning of the year? Let’s explore.
2023 return
The Rolls-Royce share price has climbed nearly 53% this year to date. That’s a remarkable comeback for a stock that was trading in pennies throughout much of the pandemic.
With £1,000 to invest at the start of the year, I could have bought 1,011 shares at 98.91p apiece. At today’s price of 151.12p, my shareholding would be valued at £1,527.82.
That’s a remarkable gain, but the short timeframe flatters the company somewhat. Many longer-term investors are still deep in the red. For instance, those who bought shares five years ago would have a holding today that’s worth less than half their initial investment.
Despite a positive recent set of earnings, this is a stark reminder that the company faces a long journey to return to full financial health.
The outlook for the shares
Looking ahead, the company’s guidance for 2023 suggests Rolls-Royce is confident it can build on last year’s impressive performance. The operating profit forecast is £0.8bn-£1bn, compared to £0.65bn in 2022.
In addition, the business expects to generate £0.6bn-£0.8bn in free cash flow, up from £0.51bn last year. Achieving this goal will be critical if the gains are to be sustained, especially as the £3.3bn in net debt on the company’s books remains a concern.
Rolls-Royce has three main sources of revenue, which totalled £12.7bn across the company’s divisions last year.
| Rolls-Royce division | Percentage of underlying revenue |
|---|---|
| Civil Aerospace | 45% |
| Defence | 29% |
| Power Systems | 26% |
The firm’s bullish guidance for 2023 rests on large engine flying hours returning to 80%-90% of 2019 levels. That looks like a punchy target, but January’s data from the International Air Transport Association (IATA) shows positive momentum in the travel sector, with international traffic reaching 77% of January 2019 levels.
Rolls-Royce’s Defence arm is benefiting from elevated geopolitical tension caused by the war in Ukraine. The US and UK governments collectively represent 75% of the company’s customer base for this division. A focus on defence spending in both countries bodes well for the business.
Finally, the company’s Power Systems division continues to exhibit strength. 2022 was a record year for the order book and order intake. Rising demand for low-carbon technologies should help the firm, which has increasingly focussed on hydrogen engines and other sustainable solutions.
Should I buy more, hold, or sell?
Overall, the outlook for the Rolls-Royce share price looks positive to me. However, there are notable risks. Debt is an obvious one. In addition, there’s a possibility investors could take profits after the recent surge, which could send the shares lower in the short term.
I’m comfortable with my position at present, and I’ll be holding my stake. If any big dips materialise as the year unfolds, I’ll consider investing more.
