It’s a great feeling when you buy a recovery stock and it goes off like a rocket, like Rolls-Royce (LSE: RR) shares just have.
I’m particularly pleased because I had been watching its shares for five years, waiting for an entry point. I finally decided the company’s fortunes couldn’t sink much lower, and swooped on 1 November. My good timing was down to luck as much as judgement, of course. Nobody can second-guess share price movements with any consistency.
This aircraft engine maker is flying
I bought Rolls-Royce shares because I thought they were cheap as chips. They are now 76% higher, so should I bank my profit, sit tight, or buy more?
In truth, there is no way I’m going to bank my profit. I never buy shares with such a short-term perspective. I didn’t buy Rolls-Royce for a quick capital hit, but to generate both growth and income over the long run.
Although the FTSE 100 aircraft engine maker axed its dividend back in 2019, as a condition of some of its loan facilities, I’m hoping that will change. The board may even recommend shareholder payments in 2023, “subject to satisfaction of the conditions and our consideration of progress made to strengthen the balance sheet”.
Otherwise we can expect shareholder payments “in the medium-term”, which is fine by me. Provided there is a medium-term, that is. Incoming CEO Tufan Erginbilgic shocked investors and staff by labelling his new charge a “burning platform”, adding that “this is our last chance”.
Shortly afterwards, the share price went gangbusters. Either investors reckon Erginbilgic is the firefighter Rolls-Royce needs, or they never took that “last chance” stuff seriously. I’m betting it’s both.
In for the long haul
The stock’s jet-like recovery was turbo-charged by last week’s expectation-beating rise in operating profits, which climbed 57% from £414m to £652m. That was down to the rise international travel after the pandemic, which benefits Rolls because its aircraft engine maintenance contracts are based on hours flown (which rose 35%). Revenue grew 20% from £11.2bn to £13.5bn.
Erginbilgic had previously told Rolls-Royce staff they can’t use Covid as an excuse, which may be good psychology but isn’t entirely true. As these results show, Covid lockdowns had a massive impact.
I’m also cheered by the latest drop in net debt. It now stands at £3.3bn, down from £5.2bn at the end 2021, due to disposals and improved cash flow. Rolls-Royce also boasts strong new order wins in its Civil Aerospace and Defence operations, and a record order book in Power Systems.
There is still a long haul ahead, as Erginbilgic knows well enough. The Rolls-Royce transformation programme still has a long way to run before it drives the company (and its share price) to the next level.
I’m in no great rush to add to my holding after the recent surge. I’ll sit tight and enjoy the sweet smell of (short-term) share price success, boosted by my low entry price.
Instead, I’m going on the hunt for more FTSE 100 bargain shares, ideally ones that haven’t just rocketed by three-quarters. I think there are plenty out there.
