In the last 12 months, the Rolls-Royce share price has rocketed. At this time last year, investors could purchase shares for 70p a piece. Today, I’d have to fork out around 210p.
But that’s still lower than the 436p I’d have paid in December 2013. This shows that there’s still a significant way to go if Rolls-Royce shares are to surpass their previous peak.
So, despite being approximately 200% more expensive than October 2022, but 51% cheaper than December 2013, would I buy, sell, or hold the engine maker’s shares in October? Let’s try and find out.
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The bullish case
The main factor behind the group’s recent strong performance is the post-Covid surge in international air travel. This has boosted revenues and brought back some business momentum. Simultaneously, heightened geopolitical tensions have served to boost defence outlays.
In August, Rolls reported a rise in first-half underlying revenue from £5.3bn to £7bn. Increases across the civil aerospace, defence, and power systems segments fuelled this solid performance.
Even more impressively, underlying operating profit came in at around double what the previous market expectations were, rising from £125m to £673m. Performance here was driven by higher revenues and improved profitability in the group’s critical civil aerospace division.
I also find the company’s multi-billion pound order book very reassuring. After all, it gives the group a substantial amount of visibility over future revenue.
Perhaps more importantly though, Rolls’ position in the defence and aerospace industry remains as robust as ever. Relative to other sectors, the extremely high barriers to entry reduce the number of smaller competitors looking to enter the market. And it’s likely to stay that way for some time.
The bearish case
While it’s hard to deny the worst is now over for Rolls-Royce, it’s difficult not to feel uncomfortable with the group’s negative equity position. In simple terms, the company’s liabilities continue to outweigh its assets.
Consequently, the company won’t offer dividends until it achieves a more financially stable position.
Furthermore, the path towards reducing net debt won’t be straightforward for Rolls. All it would take is an unexpected economic downturn or crises for revenue streams to take a hit. This would make it difficult to generate the necessary cash flows for debt reduction.
Finally, with a huge amount of revenue contingent on how many hours the engines that Rolls-Royce services spend in the air, I can’t help but find it a drawback that engine flying hours (EFH) aren’t expected to return to pre-pandemic heights until the end of 2024.
Buy, sell, or hold?
All things considered though, if I was a Rolls-Royce shareholder, I’d definitely hold.
Steadily increasing volumes and an improving financial outlook suggest to me the potential for long-term growth provided I was willing to stomach any short-term volatility.
In fact, on that basis I’d be inclined towards buying more shares, particularly given the group’s success in raising prices while simultaneously cutting costs and disposing of non-core assets.
For now though, I’ll have to be content watching this one from the sidelines since I haven’t got any cash to spare.
