At £1.50 are Rolls-Royce shares a bargain?

With the current share price implying a market cap of £12.6bn, Stephen Wright looks at whether Rolls-Royce shares are cheap relative to other stocks.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Bearded man writing on notepad in front of computer

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Right now, shares in Rolls-Royce (LSE:RR) are hovering around the £1.50 mark. At the beginning of January, they were 98p.

Created with Highcharts 11.4.3Rolls-Royce Plc PriceZoom1M3M6MYTD1Y5Y10YALL6 Jun 20186 Jun 2023Zoom ▾Jul '18Jan '19Jul '19Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '232019201920202020202120212022202220232023www.fool.co.uk

That’s obviously a significant rise since the start of the year. But with a new CEO on board, determined to push the company towards new highs, could the stock still be a bargain?

A turnaround

Over the last few months, Rolls-Royce has been starting to emerge on the other side of a difficult period. And just lately, the stock has had a couple of tailwinds behind it. 

Should you invest £1,000 in Bunzl Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Bunzl Plc made the list?

See the 6 stocks

The most significant of these is the return of air travel, especially long-haul flights. This is important because a lot of the company’s revenue comes from servicing the engines it provides for aircraft. 

More usage means more frequent servicing needs. And this, in turn, means more high-margin revenue for Rolls-Royce.

Another reason is the company has a new chief executive officer. And since his arrival, Tufan Erginbilgic has been outspoken about his desire to transform the company. 

The new CEO aims to boost profitability by improving efficiency. Rolls-Royce cut around 20% of its staff to stay afloat during the pandemic, but it looks like there’s more to come.

All of this means the next five years for the business are likely to be better than the last five. But with the stock up 50% since the start of the year, is the recovery already priced in?

A £12.6bn business?

Rolls-Royce currently has around 8.35bn shares outstanding. So a share price of £1.50 implies a market cap of around £12.6bn for the entire company. 

Is that a lot? It depends on what else is on offer in the stock market – if Rolls-Royce looks likely to make more money relative to its price than other companies, then the stock might be a bargain. 

Within the FTSE 100, there are some interesting stocks for comparison. Rolls-Royce’s current share price makes it around the same size as Bunzl (£10.6bn).

Unlike Rolls-Royce, Bunzl is not in the middle of a turnaround. It has been growing slowly and steadily, which makes it arguably more stable, but without the same scope for improvements. 

For the current year, Rolls-Royce is forecasting around £800m in operating profit. Last year, Bunzl managed £757m and is forecasting for this to increase this year.

Bunzl, though, has a much better balance sheet than Rolls-Royce does. With less debt and less interest to pay, Bunzl is arguably in a better position to convert its income to free cash.

A stock to buy?

In summary, Rolls-Royce shares look to me to be reasonably valued at the moment. At least, they do when compared with another FTSE 100 stock trading at around the same price.

I can see a case either way for the stock at the moment. If the new CEO’s efficiency plans bear fruit, then earnings could grow and the stock could turn out to be a bargain.

Equally, I think there’s a good case to be made for thinking that the risks are too great right now. If I were looking to buy shares in a business with a £12bn price tag, I’d look to Bunzl instead.

But this isn’t the only opportunity that’s caught my attention this week. Here are:

5 Shares for the Future of Energy

Investors who don’t own energy shares need to see this now.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.

While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.

Open this new report5 Shares for the Future of Energy — and discover:

  • Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
  • How to potentially get paid by the weather
  • Electric Vehicles’ secret backdoor opportunity
  • One dead simple stock for the new nuclear boom

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

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.

Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Bunzl Plc. 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.

More on Investing Articles

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Here’s the Tesco share price forecast for the next 12 months!

Tesco's valuation has dropped to multi-year lows after recent share price weakness. Is now the time to consider buying the…

Read more »

Illustration of flames over a black background
Investing Articles

Just released: March’s higher-risk, high-reward stock recommendation [PREMIUM PICKS]

Fire ideas will tend to be more adventurous and are designed for investors who can stomach a bit more volatility.

Read more »

Investing Articles

I asked ChatGPT for the best FTSE 100 investment trust to buy… here’s what it said

There aren't many FTSE 100-listed investment trusts and according to ChatGPT there’s only one winner. Dr James Fox explores.

Read more »

Investing Articles

How much should investors put in an ISA to achieve the average UK wage in passive income?

Millions of Britons use the Stocks and Shares ISA as a vehicle to build wealth, but a successful investor can…

Read more »

Investing Articles

2 cheap FTSE dividend stocks to consider buying for an ISA

The deadline for using up the Stocks and Shares ISA allowance is almost upon us. Paul Summers has spotted two…

Read more »

Investing Articles

£20k in a Stocks and Shares ISA? Here’s how an investor could target £1,342 in passive income each month

Christopher Ruane explains how a long-term approach to investing a Stocks and Shares ISA could generate a four-figure monthly income.

Read more »

Shot of an young Indian businesswoman sitting alone in the office at night and using a digital tablet
Investing Articles

Millions are missing out on ISA account benefits! Here’s what I’m doing now

Swathes of people are missing the chance to supercharge their returns with a Stocks and Shares or Lifetime ISA account.…

Read more »

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Investing Articles

Here’s my plan to survive and thrive in a stock market correction

A falling stock market can be an opportunity, but investors need a plan. Stephen Wright shares his strategy for taking…

Read more »