Despite rising 152% in a year, is Rolls-Royce’s share price still a bargain?
It might appear odd to some investors currently to ask whether Rolls-Royce’s (LSE: RR) share price is a bargain.
After all, the stock has risen from £1.49 a share on 3 March 2023 to £3.75 a year later. In fact, it is at its highest level since 6 January 2014, when it briefly traded at £3.88, before closing at £3.71.
However, the key point is that a stock’s true value is not dependent on share-price moves — up or down. A company could simply be that a company is worth more – or less – than it was before.
In fact, it might be worth a lot more than even a dramatically rising share price has so far reflected.
Is the stock still a bargain?
To ascertain whether Rolls-Royce is still a bargain, I started by comparing its key price-to-earnings (P/E) ratio with those of its peers.
Rolls-Royce currently trades on this key measurement at just 13. This is by far the lowest among its peers, which have an average P/E of 28.3.
The group comprises BAE Systems at 20.3, General Dynamics at 22.4, Northrup Grumman at 33.2, and RTX at 37.2.
On this measure, Rolls-Royce shares look very undervalued.
I then used the discounted cash flow model to try to ascertain what a fair value per share would be. This showed the stock to be around 44% undervalued at the current price of £3.75.
Therefore, I believe a fair value would be around £6.70 a share.
This does not necessarily mean the stock will ever reach that price. However, it does confirm to me that the shares still look very good value indeed.
Is this supported by the core business outlook?
The company’s 2023 results supported the idea that there is much more value left in the shares, in my view.
Underlying profit increased by £938m to £1.6bn, while revenue increased from £12.7bn to £15.4bn. Underlying operating margins more than doubled — rising from 5.1% to 10.3%. And underlying free cash flow jumped from £505m to a record of £1.3bn.
Rolls-Royce now expects free cash flow to hit £1.9bn by the end of this year. And it forecasts underlying profits as high as £2bn in the same period.
Additionally positive in the results was that large aerospace engine orders were the highest in more than 15 years.
In its defence business, the firm expects expansion in its submarine programmes, following its involvement in the trilateral AUKUS programme.
It also highlighted strong demand for power generation solutions and services in the data centre market.
This said, there are risks in the stock. Civil aerospace still constitutes around 43% of Rolls-Royce’s business, so a new pandemic would cripple its revenues in the sector. Additionally, a major problem in any of its key defence sector products would be very costly to it.
So will I buy it?
I already own shares in a company in the same sector — BAE Systems — so buying another one would unbalance my portfolio.
However, if I did not have this, I would buy Rolls-Royce shares today. The dramatic rise in price does not deter me in the slightest, as I see a lot of value left in the stock.
I think this is further supported by core businesses that look set to grow strongly over the long term.
Pound coins for sale — 51 pence?
This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
More reading
Simon Watkins has positions in BAE Systems. The Motley Fool UK has recommended BAE Systems and Rolls-Royce Plc. 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.
News Related
-
, Nov. 28 — One of the most anticipated Android releases for 2023 has been the Google Pixel 8 lineup. The Pixel series is often considered the best of what Android has to offer since it brings the true stock Android experience. The Pixel 8 Pro was globally released on ...
See Details:
Google Pixel 8 Pro Review: Is this the best Android phone of 2023?
-
A blank space or an (NR) indicates no readings received. An (e) indicates that the water level has been estimated. An (w) indicates that the conditions were very windy, resulting in an inaccurate reading. Omatjenne Dam does not have abstraction facilities. The dam contents are according to the latest dam ...
See Details:
Namwater Dam Bulletin on Monday 27 November 2023
-
Dhaka, Nov. 27 — Nobel laureate Dr Muhammad Yunus has been appointed chair of the international advisory board of Moscow’s Financial University (under the government of the Russian Federation). On November 23, he joined a high-level strategic meeting with Prof Stanislav Prokofiev, Rector of the Financial University, and his colleagues. ...
See Details:
Dr Yunus appointed chair of Moscow Financial University's international advisory board
-
In a pivotal encounter at the International Cricket Council (ICC) Twenty20 World Cup Africa Final Monday, the Cricket Cranes faced Nigeria, knowing that a win could significantly boost their chances of securing one of the coveted tickets to the 2024 T20 World Cup in West Indies and the USA.Nigeria won ...
See Details:
Victory over Nigeria puts Uganda on the brink
-
Capture 1 The Bank Ghana (BoG) Monetary Policy Committee (MPC) has maintained the key policy rate at 30 percent, while introducing additional liquidity management measures to address excess liquidity and reinforce the disinflation process. Announcing the committee’s decision on Monday following its 115th meeting, BoG Governor Dr. Ernest Addison said ...
See Details:
BoG holds policy rate at 30%, tightens liquidity measures
-
Renita Holmes has been displaced four times in the past three years by rising rents With sea levels rising around the globe, Miami, in the US state of Florida, is facing an urgent need to adapt. As property investors turn their gaze inland, away from the exclusive low-lying beach area, ...
See Details:
When sea levels rise, so does your rent
-
Picture2 In a groundbreaking moment, Mrs. Adelaide Siaw Agyepong, CEO-American International School, has achieved yet another milestone by being crowned ‘Icon of Inspiration and Impact for the Year 2023’. The crowning achievement took place in Accra, where Mrs. Siaw Agyepong surpassed contemporaries to clinch this prestigious title at the 5th ...
See Details:
American International School CEO honoured as ‘Icon of Inspiration and Impact’
-
Freetown’s streets were almost empty on Sunday after a curfew was imposed Gunmen in Sierra Leone attacked a military barracks and freed hundreds of prisoners in a “co-ordinated and properly planned” attack, the country’s information minister has said. Sierra Leoneans spent Sunday under a nationwide curfew amid disarray in capital ...
See Details:
Sierra Leone prison breaks co-ordinated - minister
-
Freetown’s streets were almost empty on Sunday after a curfew was imposed Gunmen in Sierra Leone attacked a military barracks and freed hundreds of prisoners in a “co-ordinated and properly planned” attack, the country’s information minister has said. Sierra Leoneans spent Sunday under a nationwide curfew amid disarray in capital ...
See Details:
Address the rise of single parenthood
-
Freetown’s streets were almost empty on Sunday after a curfew was imposed Gunmen in Sierra Leone attacked a military barracks and freed hundreds of prisoners in a “co-ordinated and properly planned” attack, the country’s information minister has said. Sierra Leoneans spent Sunday under a nationwide curfew amid disarray in capital ...
See Details:
Hyundai Chief Picked as Auto Industry Leader of the Year
-
Freetown’s streets were almost empty on Sunday after a curfew was imposed Gunmen in Sierra Leone attacked a military barracks and freed hundreds of prisoners in a “co-ordinated and properly planned” attack, the country’s information minister has said. Sierra Leoneans spent Sunday under a nationwide curfew amid disarray in capital ...
See Details:
Unmarried People Under 35 Outnumber Married Ones
-
Freetown’s streets were almost empty on Sunday after a curfew was imposed Gunmen in Sierra Leone attacked a military barracks and freed hundreds of prisoners in a “co-ordinated and properly planned” attack, the country’s information minister has said. Sierra Leoneans spent Sunday under a nationwide curfew amid disarray in capital ...
See Details:
European interior ministers in Hungary to discuss migration
-
Freetown’s streets were almost empty on Sunday after a curfew was imposed Gunmen in Sierra Leone attacked a military barracks and freed hundreds of prisoners in a “co-ordinated and properly planned” attack, the country’s information minister has said. Sierra Leoneans spent Sunday under a nationwide curfew amid disarray in capital ...
See Details:
Japan on the watch for unlicensed taxis around Narita airport amid foreign tourism spike
-
Freetown’s streets were almost empty on Sunday after a curfew was imposed Gunmen in Sierra Leone attacked a military barracks and freed hundreds of prisoners in a “co-ordinated and properly planned” attack, the country’s information minister has said. Sierra Leoneans spent Sunday under a nationwide curfew amid disarray in capital ...
See Details:
ECOWAS to send high-powered delegation on solidarity visit to Sierra Leone
OTHER NEWS
Despite doing education at the university, Mellon Kenyangi, also known as Mama Bear, did not think of going to class, and teaching students was her dream job.“Since it was not ...
Read more »
213 Sri Lanka Cricket’s Chairman of Selectors, Pramodya Wickramasinghe reported to the Sports Ministry’s Special Investigation Unit( SMSIU) for the Prevention of Sports Offences yesterday for the second day. He ...
Read more »
137 Malindu Dairy (Pvt) Ltd., a leading food production company in Sri Lanka, won the Silver Award in the medium-scale dairy and associated products category at the Industrial Excellence Awards ...
Read more »
Africans Urged to Invest Among themselves, Explore Investment Opportunities in Continent Addis Ababa, November 27/2023(ENA)-The Embassy of Angola in Ethiopia has organized lecture on the “Foreign Investment Opportunities in Angola ...
Read more »
144 The dynamic front row player Mohan Wimalaratne will lead the Police Sports Club Rugby team at the upcoming Nippon Paint Sri Lanka Rugby Major League XV-a-side Rugby Tournament scheduled ...
Read more »
Dozens of people living with disabilities from New Hope Inclusive in Entumbane, Bulawayo on Saturday last week received an early Christmas gift in the form of groceries. The groceries were ...
Read more »
The East African Community (EAC) Summit of Heads of State has admitted the Federal Republic of Somalia to the regional bloc, making it its 8th member country. The decision was ...
Read more »