The past six months have been fantastic for shareholders in famed British engineering firm Rolls-Royce Holdings (LSE: RR). Its shares have skyrocketed since their lows of September 2022.
After showing such supreme strength since the autumn, is Mr Market getting carried away? More precisely, have Rolls-Royce shares got too far ahead of the company’s prospects?
Rolls-Royce stock surges
As I write, Rolls-Royce shares trade at 151.7p. This values the Derby-based aerospace and defence company at £12.7bn, making it a FTSE 100 stalwart.
However, back in September, this stock looked sickly. On 28 September 2022, it hit a 52-week low of 64.44p. That proved to be a turning point for this widely held and traded stock.
On 9 March, Rolls-Royce shares shot up to a 52-week high of 160p. That’s a remarkable return of 148.3% from their low in just over five months.
Even after dropping back to current levels, this stock has gained 135.4% since September’s low. Here’s how the share price has performed over seven periods:
| Current price | 151.7p |
| One day | +1.8% |
| Five days | +4.6% |
| One month | +1.4% |
| Year to date | +62.8% |
| Six months | +117.4% |
| One year | +51.2% |
| Five years | -49.1% |
Over six periods ranging from one day to one year, Rolls-Royce shares have delivered positive returns. What marvellous momentum for shareholders, given that the stock has almost halved over five years.
By the way, this makes Rolls-Royce stock the FTSE 100’s best performer in 2023, by a wide margin.
Rolls-Royce is a great business
I’m a big fan of Rolls-Royce as a business. Indeed, several of my family members in Derby have worked for this famous firm. But three things worry me about this stock today.
First, the shares trade on a sky-high price-to-earnings ratio of 76.4, which translates into an earnings yield of a mere 1.3%. This makes this stock among most expensive in the Footsie.
Second, as a value/income investor, I prefer shares that pay dividends. To preserve cash, Rolls-Royce cancelled its cash payout during 2020’s ‘pandemic panic’. Given the need to boost cash flow, I suspect bringing back dividends is the last thing on the board’s mind.
Third, thanks to the collapse in air travel in 2020/21, this storied group’s balance sheet includes net debt of £3.3bn. Then again, this has shrunk from £5.2bn at end-2021, due to disposals and higher cash flow.
Would I buy Rolls-Royce shares today?
Now for some positive points. After airmiles flown surged strongly in 2022, analysts expect this promising trend to continue in 2023/24. As revenues from the firm’s jet engines are linked to miles flown, this would deliver a big boost to Rolls-Royce’s future earnings.
Likewise, increased defence spending following Russia’s invasion of Ukraine should amplify growth in Rolls-Royce’s defence arm. And with 50,000 employees, 2022 revenue of £13.5bn, and a pedigree stretching back to 1904, this group is one great British business.
That said, I will pass on the opportunity to buy Rolls-Royce shares right now. As an old-school value investor, they look a bit too highly priced for me today!
