My only regret about buying Rolls-Royce (LSE: RR) shares on 1 November is that I didn’t buy more of them. They’ve been an instant smash hit in my portfolio, rising 26.19% in just over two months.
I spent several years dithering over whether to buy the shares, and in retrospect I’m glad I didn’t buy earlier. They’ve suffered an ignominious slide for some time, falling 18.51% over one year and 65.1% over five years.
So glad I bought when I did
Last autumn, I decided the sell-off had been over done, and swooped. Of course, two months tells me very little. Whenever I buy shares, my time frame is 15 to 20 years. I’m not a trader, but a long-term investor.
So I’m not considering banking my good fortune and moving on. Quite the reverse. The question is whether I buy more Rolls-Royce shares, rather than sell the ones that I have.
Rolls-Royce has flown on the back of a wider FTSE 100 recovery. Over the same period, the index climbed 7.32% from 7,186 to 7,712. Sentiment is improving across the board, as investors anticipate peak inflation and lower interest rates by the end of the year
I imagine that many of them will have targeted Rolls-Royce, precisely because it sold off more than most in the slump.
There’s also been some good news coming out of the company. Two days after my share purchase, Rolls-Royce published annual guidance suggesting that cash flows had held firm through the year’s market turmoil and inflation.
The company makes aircraft engines and gets paid on a miles-flown basis, thus benefiting from the post-Covid travel industry recovery. That’s good news but the recovery remains at the mercy of Chinese Covid issues and a global recession.
Demand has also been hit by the inflation shock, although many of its long-term contracts contain inflation-linked pricing clauses. Guidance was unchanged, which in these troubled times is seen as a mark of success.
FTSE 100 value stock
Rolls-Royce shares were handed a further boost by Barclays analysts claiming that the stock is a “value unlock”, and a big contract win from the US military to replace the Black Hawk utility helicopters.
The company’s plan to pepper the UK with 30 small-scale nuclear reactors has also captured the imagination.
Rolls-Royce still has a long way to go, especially with nuclear. It pays no dividend, and its profit margins are thin at just 4.7%. JP Morgan recently noted that net debt is around £15bn once you include customer advances, pension liabilities, money owed to joint ventures and cash provisions, making the balance sheet “very weak”. It set a share target share price of 70p, which worries me given that the stock currently trades at 103p.
I’m delighted to have bought Rolls-Royce, but I’m in no rush to buy more at today’s price. Instead, I will go hunting for other under-priced opportunities and leave my current stake to prove its worth.
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Harvey Jones holds Rolls-Royce Holdings. 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