When I wrote about Aero Engine Manufacturer Rolls Royce (LSE: RR) In August, it recently broke 100 points, losing its inevitable status as a penny stock. This seemed to be the right time to consider whether the run-up of troubled stocks was sustainable.
And I did just that. My roughly cut estimate gave 140p a conservative figure for the near future. At the end of September, Rolls-Royce share prices also broke this level. Plus, in the same article, I said I had an idea that the share price might actually be even higher next month.
Can Rolls Royce’s share price rise further?
When FTSE 100 The stock has maintained its 140p + level over the past three weeks despite a somewhat weak stock market, now it seems like a good time to evaluate whether my share price could really be higher. With no earnings update in the interim, the rising price of the stock over the past month and a half has pushed its price-to-earnings (P / E) ratio more than 15 times. It increased from about 12 times seen in August.
I was unable to find the update FTSE 100 P / E, but I think it is reasonable to assume that it will not change so much, since it is an average ratio of all its components. Also, The index actually declined 1% from August to September. And it hurts to remain unchanged since September this month, so the value of the index hasn’t gone anywhere recently. Based on this, I proceeded with the assumption that its P / E is 15 times.
This could be a good explanation for why the Rolls-Royce share price rise has recently stalled. Based on how much it has risen, it is now worth as much as the average FTSE 100 stock. If there is no reason not to believe that its performance can improve a lot, I think there are limited reasons for its share price to rise further.
Good financial for FTSE 100 stocks
However, there is reason to believe that it could show an improved balance sheet. There is a lot of information in the stock that makes it clear that it is on the right track. An important recent move was its Spanish subsidiary ITP Aero, which manufactures wind engines and gas turbines, in a consortium of Bain Capital private equity and investors for about 1. 4 1.4bn.
Last year, the company announced a b 2bn disposal program as part of its plan to rebuild its balance sheet and bring its credit profile back to investment grade. Since it was a big settlement, ITP Aero was an important step towards achieving the goal, which has now been met.
It moved its Norwegian maritime engine business, called Bergen Engines, to UK-headquartered engineering company Langley Holdings. The Norwegian government blocked the sale of the business to a Russian company for security reasons. It has sold its stake in Air Tanker Holdings, which owns the Voyager aircraft, which supplies air-to-air fuel to the Royal Air Force fleet.
Also, it won a 2.6 billion contract to supply engines from the U.S. Air Force. It will now supply 608 engines, including parts and accessories used in the bomber fleet. Its report was released at about the same time as the sale of ITP Arrow business, as a result of which its share price has gone above 140p.
While the U.S. Air Force contract is likely to be long, delivered on a stagnant basis over time, I think it’s great for Rolls-Royce to get some revenue visibility, which could make it easier to evaluate how to perform in the upcoming quarter.
Rolls Royce wants results
In the first half of 2021, its revenue decreased by%% on a legal basis compared to the first half of 2020. And there is very little comfort in its underlying number, which is reduced by 3.4%. Most of it was still a lockdown period. The world economy has not begun to recover sustainably and the world is still fighting Kovid-1. But now that things are looking up, it’s nice to see that its performance is also increasing.
I think it would be important for Rolls-Royce to increase its earnings over the next two quarters in order to maintain its share price performance. It so happened that despite its unimaginable revenue, the company was able to return to net profit after reporting massive losses last year. This may sound encouraging, but the fact that it was managed by a large tax credit accounted for more than 70% of the profits. I’m not sure if it will be found again. But if its revenue shows a healthy growth, perhaps the company can still remain profitable.
Share price view
Based on this, I see two scenarios ahead for the price of Rolls-Royce shares. If it maintains a profit, it can be stable for the stock. But the amount it does is also important. If the figure declines, its P / E will increase, making it more expensive and potentially less attractive to investors. If it falls into losses again, I think it could go back to the penny stock area again, unless it has a strong outlook.
What would I do
Its own performance is now particularly critical, considering that the larger environment is rarely helpful. The stock market is concerned about global developments, from inflation to stimulus rollbacks. The numbers released today were also disappointing for the UK economy. The economy grew by just 0.4% in August, emphasizing a gradual recovery. This, too, could play into market sentiment.
Keeping the balance, I think the risk of Rolls Royce share price has only increased. The stock is more valuable than ever, which makes further growth less admirable. It doesn’t help that the market mood isn’t terribly bright either. News of its settlement and its deal is positive, but it will show its profits. Its final income numbers were boosted by tax credits. But for the shares to grow steadily, it is better to get high profits from the business. I will wait for its next result before deciding whether to buy Rolls-Royce stock.