A year ago, I wondered whether Rolls-Royce Holdings (LSE: RR.) shares were a steal at under a pound. I wasn’t sure.
It turns out they were. So far, at least, from where we’re looking today. Things have change since then, for the better. And we saw a key milestone in February.
Cash flow
Rolls had stuck all year to its aim for positive cash flow for the full year. And it pulled it off, with some breathing space.
The firm’s £505m of free cash flow was worth getting out of bed for, and investors rushed for their buy buttons.
What next?
H1 results for 2023 are due on 3 October. And for a repeat of February’s impact, I reckon Rolls might have to pull something special out of the bag.
Right now, though, I’m not sure what that might be. Instead of any new milestone, I expect to see just steady progress, inching towards the board’s outlook for the year. But that’s fine. If I owned Rolls-Royce shares, it’s just what I’d want.
And so far, it sounds like things are going according to plan. In May, Rolls told us it is “already benefitting from the actions [it is] taking as well as recovery and growth in [its] end markets“.
In line
The company also told us that, year to date, performance was in line with expectations.
Are Rolls-Royce shares a steal now? I think that’s a tricky one.
We face the fact that this is not the same company we were looking at before the pandemic. It’s slimmed down now, and has sold off a lot of its non-core stuff. That was mainly to raise some cash to help deal with debt.
But it does mean that comparisons with the past might not be so useful now. And it could take some time to get a feel for the profit levels to expect from the new Rolls-Royce.
Valuation
There’s one thing in particular that I really don’t think we can compare. And that’s valuation.
Forecasts put the full-year price-to-earnings (P/E) ratio at a bit over 30. Is that too high? By 2025, analysts expect it to have dropped to 15. Is that cheap? I just don’t know.
None of it takes debt into account, either. And we have no idea where that will go in the next three years. The big reduction in 2022 was largely thanks to those disposals, and we won’t have that this year.
Buy, or sell?
The board, so far, has under-promised and over-delivered. If it can do that again come August, I think we could see the stock getting another boost. And I have a sneaking feeling that Rolls could impress us again this year.
But I fear we might not see much flesh on the bones until the end of the year. The second half is often bigger in this business.
Steady
So yes, steady but unexciting. That’s what I think we should expect. And maybe I’ll be back here next year asking if Rolls-Royce shares are a steal at £2, or more. I still can’t make up my mind.
