I’ve watched Rolls-Royce (LSE: RR) shares rise and rise in value. But I’m yet to make a move.
In the last 12 months, they’ve posted a 147.7% gain. In 2024, they’ve risen another 20% as investors continue to pile in on the FTSE 100 constituent.
But what does that mean now? Rolls has impressed in recent times, but where will the stock go next?
A major turnaround
Rolls has been provided with a new lease of life under CEO Tufan Erginbilgic. He took over the firm at the beginning of 2023. In the early days of his tenure, he called the company a “burning platform”.
But that doesn’t seem to be the case now. In 2023, the business more than doubled its underlying operating profit to £1.6bn. It reported a record free cash flow of £1.3bn.
That’s a major U-turn from its 2020 woes. At one point, it seemed the firm was nearing bankruptcy.
This is largely down to the turnaround strategy Erginbilgic has put into place. He’s cut jobs and has major plans to continue streamlining the aviation giant.
For the upcoming year, the firm is expecting operating profit to sit somewhere between £1.7bn and £2bn. By 2027, Erginbilgic expects this figure to be closer to £2.8bn.
A sustainable rise?
But the Rolls journey is in its early days. And I’m still cautious about a few things.
While ongoing global tensions will provide its defence division with a boost, there’s always the risk they could also hinder Rolls’ operations. The business highlighted that it expects supply chain issues to persist into 2024, so this is something to watch.
On top of that, it could be argued that investor hype has been driving the stock’s performance. A near 150% jump in a year is impressive. But is it sustainable? Inevitably growth will slow in the years ahead. This could upset investors who have high expectations.
I also have questions about its dividend. It was cut back in 2020 and it’s yet to be reinstated. With free cash flows on the rise, I’d expect investors will be hoping the business looks to change that soon. That said, as long as its share price keeps performing the way it has been, I don’t think shareholders will be complaining.
What next?
So where will the Rolls share price go from here? In all honesty, I’m not sure.
On the one hand, there’s always the concern that Rolls stock has gone too far too fast. The last thing I want to do is open a position only for there to be a market correction.
On the other hand, Erginbilgic talks the talk. And in all fairness, he’s delivering so far on his ambitious vision.
It’s also reduced its debt from £3.3bn to £2bn, which is a solid step in the right direction. Previously, this was a large concern of mine.
Maybe we’re past the stage where the Rolls share price seems to be driven by hype. The business looks like it’s on track to continue performing strongly. I’m becoming more and more tempted to open a position.
This post was originally published on Motley Fool
