Every time I think about Rolls-Royce Holdings (LSE: RR.) shares, I see reasons to buy. So why do I keep shying away? I’ll come back to that. But first, the share price has been recovering nicely since October, though it’s still down over the past 12 months.
Aviation
The aviation business is recovering. Despite pressure on the spare cash on our pockets, folks around the globe are flying away on holiday again. Even China is opening up, and its citizens are rushing to the airports.
In its latest trading statement, Rolls told us that its large engine flying hours are back to 65% of the pre-pandemic levels of 2019. That’s impressive.
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I want to see how the final couple of months of 2022 went, and what effect rising global inflation and interest rates might have had. Fortunately, we only have until 23 February to wait.
Balance sheet
Throughout the past few years of crisis, the biggest fear was over Rolls-Royce’s liquidity. The company had to take on a humungous amount of new debt. And it engaged in some serious disposals to shore up its cash position.
But we’re past those worries now, and disposals have done the job. Rolls has even been able to repay a £2bn loan ahead of schedule.
The November statement said: “This marks a milestone recovery in the strength of our balance sheet, and a clear step on our path back to investment grade in the medium term“.
Pessimism
Wherever I look these days, I’m seeing negativity. Investor sentiment seems to be dominated by gloom merchants, naysayers and pessimists.
Gold is still up close to $2,000 per ounce. It climbed when the pandemic hit, and it’s stayed there. It represents all the money that’s been taken out of the stock market by investors who are too scared to recognise cheap shares when they see them.
As Sir John Templeton, one of the smartest investors of all time, once said: “The time of maximum pessimism is the best time to buy.“
Risk
So why haven’t I bought Rolls-Royce shares? Well, I still see a couple of major risks.
One is that, despite recent progress, Rolls-Royce still looks to be some way from sustainable earnings growth. Forecasts really don’t suggest earnings will get back to anything substantial for another couple of years.
In the meantime, the firm is still vulnerable to any new economic crisis that might emerge. And after the disastrous decade or so we’ve had, I reckon it would be reckless to assume nothing else bad is going to happen.
Valuation
Valuation is the other thing that holds me back. Specifically, it’s very hard to decide a meaningful share valuation by any of the usual metrics right now. Price-to-earnings (P/E) ratios are all over the place. And the still-significant debt makes it near impossible to think about what kind of safety margin I’d need in a valuation, even if I could calculate one.
Part of me still wants to buy though.
