Image source: Rolls-Royce plc
On 31 July 2023, I penned an article posted on this very website titled “At 193p, are Rolls-Royce shares a slam-dunk buy?”. I sit down to write this on the 2nd anniversary of said article with a definitive answer to the question. Yes. Yes, they were.
They’re up more than five times since then! They are nestling happily at the number-one spot on the two-year FTSE 100 leaderboard. No other Footsie stock has even tripled! Rolls-Royce (LSE: RR) shares deserve every superlative thrown their way, whether basketball-themed or otherwise.
The question I’m asking myself now is whether, at £10.85, Rolls-Royce shares could still be a slam-dunk buy?
More flying?
A key metric to keep an eye on is flying hours. The dip in the Rolls-Royce share price arrived during a downturn in flights and flying hours because of the pandemic. Likewise, recent record highs for the share price come as airports like Heathrow are breaking records for passenger numbers. Rolls-Royce’s aircraft engines account for much of its revenue, so more flying hours tends to bring beefier earnings.
The question then is of the future. Will globalisation continue apace? Will the world’s populace tot up ever more aeroplane rides as time goes on? I wouldn’t bet against it.
If flying hours continue their trajectory as a long-term sustained catalyst, then it is surely twinned with the sector’s barriers to entry. Rolls-Royce can boast of engineering expertise dating back over a century. This technical know-how creates a vast chasm for any would-be competitors to cross.
Even if some hip engineering startup did start creating similar products, airlines are likely to prioritise safety in the engines they put in their aeroplanes. The familiar name with the long and reliable history is likely to emerge victorious. As such, I believe the long-term operations and revenues of Rolls-Royce to be very safe.
A buy?
At the risk of stating the absolute bleedin’ obvious, I like the company. Rolls-Royce, in my estimation, will enjoy a very bright future. However, when it comes to buying or selling the shares, we have a share price and a valuation to think of.
The firm’s forward price-to-earnings ratio stands at 42 as I write. That’s expensive. Compare it to the Footsie average of 14. If the markets start valuing Rolls-Royce on a par with the rest of the FTSE 100, then the shares would drop in value by about two-thirds. Looking at it through another lens, every pound invested in the stock today will take 42 years to earn it back as profits, assuming forecasted profits don’t change.
I’m not going to sell the shares I own. Let your winners run, as they say. But I would not describe the shares today as a slam-dunk buy.
