Shares in Rolls-Royce (LSE:RR) are up around 152% over the last 12 months. So it’s natural for investors to wonder whether it’s now too late to participate in the stock’s rally.
Insider activity at the firm indicates that it might not be. A couple of the company’s directors have been buying shares since the start of the year, which might mean the price has further to rise.
Insider buying
When insiders sell shares, it’s often insignificant. It can be because they need the cash, want to diversify their holdings, or some other reason that doesn’t imply a lack of faith in the business.
On the other hand, directors buying shares is usually a sign of conviction in their company. The only reason to put money into the firm as an investor is because it looks likely to do well.
That’s why a couple of insider transactions at Rolls-Royce have been catching my eye lately. Both have come from directors who came from BP with new CEO Tufan Erginbilgic.
In January, CFO Helen McCabe bought 3,942 shares at £3.07 per share. And independent non-executive director Dame Angela Strank bought 5,643 shares last month at a share price of £3.52.
Since then, the Rolls-Royce share price has gone up. But the purchases are recent enough to convince me that it’s worth taking a careful look at the stock from an investment perspective.
Fundamentals
A 152% increase in the Rolls-Royce share price entails that the company’s shares were better value a year ago than it is today. But it doesn’t automatically mean buying the stock today is a bad idea.
I think it’s fair to say that Rolls-Royce is currently benefitting from some cyclical advantages. Military spending is high and travel demand is strong, both of which help the firm’s profitability.
There’s a risk these might subside in the near future, creating a more difficult operating environment. But it looks to me as though there are other positives as well.
The company is targeting £3bn in annual free cash flow over the medium term. It would be a bargain at today’s prices if it achieves that, but even if it doesn’t, it might be cheap anyway.
Analysts at Bank of America point out that the company trades at a much lower multiple than similar firms like Safran and MTU. Simply closing this gap could boost the Rolls-Royce share price.
Do your own research
The insider buying at Rolls-Royce isn’t a good enough reason for me to buy the stock myself. But it is enough to convince me to take a closer look to see what’s going on.
I think there are a couple of reasons the share price can go higher even from today’s levels. One is the possibility of further growth and the other is the potential for a higher trading multiple.
If the company can get anywhere near its medium-term targets, I would expect the share price to rise. Even if it doesn’t, the trading in line with its industry peers should see the stock move higher.
The second is a more speculative reason, but I still think it’s worth considering. Rolls-Royce isn’t top of my list of stocks to buy in March, but it does look like a decent investment at today’s prices.
This post was originally published on Motley Fool
