At £1.54, can the Rolls-Royce share price go any higher?
The Rolls-Royce Holdings plc (LSE: RR) share price traded at only 66p as recently as the November just gone. Since then, the share price has climbed all the way up to £1.54. That’s a stunning 121% leap and puts the company as the top riser on the FTSE 100 this year.
The question then: can it go higher? Well, one detail that didn’t escape my attention is that the share price is still down over 60% from all-time highs. That’s a golden opportunity if the stock could return to previous highs. Here’s how I reckon it will pan out.
A British success story
Rolls-Royce has been nothing short of a British success story. Between 2003 and 2013, the company’s share price shot up a staggering 1,701% and investors who held a position in the UK-based aerospace and defence firm were handsomely rewarded.
Even today, the brand is one of the most prestigious and recognisable worldwide. Business Insider put Rolls-Royce in its ‘top 10 companies, ranked by reputation’ along with Rolex, Disney, and Lego.
While the name is perhaps more associated with luxury cars, which are made by a different company (Rolls-Royce Motor Cars is owned by the BMW Group), the FTSE 100 stalwart derives much of its revenue from its civil aerospace division, where it manufactures and provides aftermarket care for aero engines. And this is where the trouble began.
In 2020, the Covid-19 pandemic brought a sudden halt to air travel. This was a disaster for Rolls-Royce as revenue went down but obligations didn’t go away. The company had running costs and needed to pay them.
The data shows that the company built up an eye-watering debt pile to keep the lights on. And clearing that debt will be the first step to an increase in share price.
Can the share price go higher?
So this brings us to the present day. International travel is getting back to normal so revenues are up, and the company’s recent earnings showed it was getting a handle on its debt. Here’s what those figures for debt and revenue look like if we add 2022.
Revenue and debt both look healthier. And this explains why the share price jumped 42% last week after earnings.
The bad news? The debt was paid off with the help of the one-off £1.5bn sale of ITP Aero. While it’s good to know that debt repayment is a priority, selling off assets is not a sustainable way to reduce debt.
A strong brand and increasing revenue tells me that the share price will go higher in the long run, probably returning to all-time highs in the next few years. But I don’t think it will be a quick process.
Earnings per share sits at only 2p. If we compare that to the share price of £1.54 we get a price-to-earnings ratio of 77. That’s an expensive valuation compared to the FTSE 100 average of around 14, and means I won’t be rushing to invest myself.
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John Fieldsend has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
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