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Why I’m looking at Rolls-Royce shares for 2023

Edinburgh Cityscape with fireworks over The Castle and Balmoral Clock Tower
Image source: Getty Images

It has been a tough year for holders of Rolls-Royce (LSE:RR) shares. The share price is hovering around the 85p mark after rallying recently, but that still puts it down nearly 38% since January.

The company has struggled with the pandemic hangover experienced by airlines this year. Aircraft order cancellations mean Rolls-Royce has lost a significant portion of its future engine orders.

Additionally, analysis from JP Morgan cast doubt on Rolls-Royce’s expansion into small nuclear reactors. The company is investing heavily in creating small modular reactors (SMRs) that can be built cheaply and used more widely than traditional nuclear power stations. However, it doesn’t expect to have them up and running until the early 2030s.

Despite this, there could still be potential in the company. So here’s why I’m looking at Rolls-Royce shares for 2023.

Looking to the future

The need for clean, reliable, and cost-efficient energy is clear. Countries are setting targets of breaking away entirely from fossil fuels over the next 20-30 years. To do that, technology that we don’t have now will be needed.

Rolls-Royce hopes to be one of the companies providing such technology. Its proposal for small modular reactors is bold. By 2050, Rolls-Royce hopes its SMR consortium will be able to provide 20% of the UK’s grid energy.

It aims to do this by building the reactors using existing supply chains and off-the-shelf parts. If successful, it would cut down on the cost, size, and time requirement compared to a traditional nuclear power station.

Potential for growth

Clean, cheap, and scalable energy sounds like a gold mine. So why is the Rolls-Royce share price still so low? Well, there’s debate over whether Rolls-Royce’s plans will be profitable quickly enough, or indeed at all. That’s the sticking point for JP Morgan analysts.

That’s why I’m watching Rolls-Royce’s share price like a hawk. If its aircraft engine sales fall further, the company could be in serious trouble. Yet, if its engine sales stabilise long enough for the company to bring its SMR project to fruition, it could have huge growth potential.

The reason I’m still only watching Rolls-Royce shares is that there are substantial risks. The company has debts that are due in 2024. So if I’m buying the company for growth over the next decade, I want to be sure it can survive that long.

The company’s price-to-earnings (P/E) ratio currently sits at an unattractive 59. If Rolls-Royce’s order book takes any more hits, that could make a bad situation significantly worse.

If that P/E ratio gets worse, I’ll want to skip adding Roll’s-Royce to my portfolio in 2023. However, if it starts to balance out from the share price dropping further or earnings improve, I’ll find the risk of investing long term more palatable.

The post Why I’m looking at Rolls-Royce shares for 2023 appeared first on The Motley Fool UK.

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Matt Cook 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 2022