Stock market

Is the Rolls-Royce share price on the rise?

Image source: Rolls-Royce plc

The stock market has been quite the journey for him. Rolls Royce (LSE: RR) in recent years. Standing in the money in 2022, Rolls-Royce’s share price has rebounded. Shares in the aeronautical engineer have recently topped £4 each and have reached £4.35 this month.

The past few days though saw a slide in shares. This may just be part of the normal volatility of the markets. But it could also be a sign that Citi thinks the shares have flown too high, too fast, and the price is reacting accordingly.

Incredible addition

Last year, Rolls did a great job. FTSE 100 share. Since then, it has continued to gain momentum, rising 37 percent so far this year.

This is the result of two things. One is to improve business performance, as demonstrated by last year’s results. A tax loss of £1.1bn last year turned into a £2.4bn profit this time around.

But the other factor is that Rolls-Royce management has high expectations when it comes to future performance.

This has excited investors. If Rolls-Royce can meet its medium-term targets, even its current share price may look good. For example, the current market capitalization of around £35bn is around 12-14 times the targeted underlying operating profit for 2027.

If the firm can achieve these challenging goals in the medium term, it may do even better in the long term. On that basis, Rolls-Royce’s current share price may yet prove to be a long-term bargain, even after its spectacular rise over the past year.

show me the money

So, why do shares seem stagnant in recent days? It’s important to put things in perspective – a few days’ decline doesn’t necessarily indicate a long-term trend.

For now, it’s too early to know if Rolls-Royce’s share price is on the upswing.

I think some investors will be taking profits off the table by happily selling the huge paper profits of recent months into real cash. This may partially explain the recent price movement.

It could also be that shares are stalling for reality to catch up.

Business potential associated with medium-term goals has led to significant price increases. But they remain targets – now City are waiting to see how well Rollis can do on them. However, it has a long history of financial performance, followed by some very weak years.

On that basis, I think the shares may have peaked for a while, pending further evidence that the business is on track to deliver. This may come in the form of a business statement, or at the interim results stage, for example. However, only time will tell.

My opinion

Although I like the business, I think the current Rolls-Royce share price gives me little margin of safety as an investor.

The business has a large installed customer base, limited competition and unique technology… all strong points.

But a sudden unexpected event could hurt demand from airline customers overnight, a risk that I don’t think is accurately reflected in the current share price.

For this reason, I have no plans to buy.

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