A Stocks and Shares ISA holding £20,000 of Rolls-Royce (LSE: RR.) shares in July 2021 would be worth close to £300,000. That makes even the FTSE 100’s 49% gain look pretty pedestrian.
Importantly, however, the analyst community didn’t see this coming. The consensus view of the stock five years ago was Hold – and I think there’s a lesson in that for investors.
How it happened — and what comes next?
Five years ago, Rolls-Royce was in deep trouble. It was running out of cash, had huge amounts of debt, and revenues were being crushed by pandemic-related travel restrictions.
Then everything changed:
- Engine flying hours recovered following the end of Covid-19.
- Defence budgets increased across NATO members.
- Tufan Erginbilgiç’s transformation programme boosted internal efficiency.
As a result, cash flows increased. The firm used these to strengthen its balance sheet, which resulted in lower interest costs, driving cash flows even higher.
A big part of the rising share price, however, isn’t just the fundamental business improvements. It’s how the stock market sees those changes.
The stock has gone from trading at a price-to-sales (P/S) multiple of 0.8 to 5.39. That’s a 10-year high and it’s matched by operating margins that are also at their widest levels in a decade.
Source: Fiscal.ai
The consensus among analysts now is Strong Buy. But at high multiples and with unusually wide margins, it’s not about recovery any more – investors are looking to break into uncharted territory.
The next Rolls-Royce?
I think Bunzl (LSE:BNZL) – a FTSE 100 distributor of consumables for businesses – looks a lot like the Rolls-Royce of five years ago. And it has an extra growth engine of its own.
There are a few key similarities:
- Bunzl is coming through a difficult part of the cycle, with deflation and destocking weighing on growth.
- Operational errors in its shift to own-branded products have created challenges in North America.
- The stock is trading at a price-to-earnings (P/E) multiple well below its 10-year average.
Investors didn’t really see the Rolls-Royce recovery coming. I think, however, there are clear signs that Bunzl is moving in the right direction.
Organic sales growth is starting to pick up. And the firm’s June update reported that its North American business is “largely restored” after its problems last year.
On top of this, Bunzl has an additional weapon. It has an acquisition pipeline to boost growth further.
I think the stock is well worth considering for investors hunting the next UK growth story. At 12% of my own ISA, it’s only diversification – not conviction – that stays my hand.
What do the analysts say?
The consensus view of Bunzl among analysts is Neutral. And it’s always worth remembering that there are no guarantees when it comes to investing.
Bunzl’s recent challenges represent ongoing background risks. A recession in the US, a shift in strategy, or a challenging year for acquisitions are all potential issues.
These are all worth taking seriously. The question for investors is whether the potential opportunity is worth it.
I can understand the reasons for caution. But it’s worth remembering that Hold was also the consensus view among the analyst community for Rolls-Royce shares five years ago.
The lesson for investors is clear. Following the crowd can work, but the best opportunities often come from doing something different.
Should you invest £5,000 in Bunzl Plc right now?
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Stephen Wright owns shares in Bunzl.
