The Rolls-Royce (LSE:RR.) share price has enjoyed a spectacular recovery in recent months. The FTSE 100 engine builder has risen a stunning 59% from October’s lows. And it’s got 2023 off to a flyer too, moving back above 100p per share for the first time since last spring.
I’ve so far resisted buying Rolls-Royce shares for my portfolio. Have I left it too late? Not necessarily.
Reasons to be cheerful
I believe there are several good reasons to expect Rolls-Royce shares to continue their northwards march. First among them is the bright outlook for travel markets.
High inflation across the globe is heaping huge pressure on consumer and business spending. Yet demand for plane tickets remains rock-solid, reflecting a strong desire for travel following Covid-19 lockdowns.
The airline recovery could continue as inflationary pressures steadily abate too. This week, United Airlines — the world’s third-biggest airline by revenue — said it expects profits to quadruple in 2023 as it predicts strong passenger numbers.
A robust civil aerospace market isn’t the only reason to be positive about Rolls shares either. Trading at its Power Systems engine division is also white hot and order intake hit record levels in the first 10 months of 2022.
The company’s Defence arm is also robust and it racked up $1.8bn worth of contracts between January and October.
Still pretty cheap
Some share investors could argue that such good news is reflected by Rolls-Royce’s soaring share price. But others would argue that the company’s valuation remains too low given bright industry conditions.
City brokers think the FTSE firm’s earnings will soar 350% year on year in 2023. This leaves it trading on a forward price-to-earnings growth (PEG) ratio of 0.1. Any reading below 1 indicates that a stock is undervalued.
This rock-bottom reading could provide the scope for fresh share price gains. But the number crunchers are split on whether Rolls is a good investment at current prices.
Of the 16 analysts with ratings on Rolls-Royce shares, four rate the company as a ‘buy’ while five have slapped a ‘sell’ rating on it. A further seven have taken a neutral stance on the engine builder, according to stock screener Digital Look.
So where do I stand?
As I say, I’ve resisted buying this FTSE 100 stock so far. And I’m happy to continue investing in other UK shares today.
Okay, the revenues outlook across Rolls-Royce is very encouraging. But it may not translate into blockbuster profits at the business battles supply chain issues and high cost inflation.
Such problems resulted in a whopping £1.6bn loss in the first half of 2022. They could remain problematic too as the Ukraine war continues and China’s Covid-19 crisis endures.
I’m also avoiding Rolls-Royce shares because of its high debt levels. This casts doubt on how much the business will be able to invest in its growth projects. It could also affect when the company will reinstate dividends and the size of eventual payouts.
All things considered, I’d rather buy other cheap FTSE 100 stocks for my investment portfolio.
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Royston Wild 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.
Motley Fool UK 2023