With the Rolls-Royce (LSE: RR) share price down 12% over the past 12 months, I think it’s looking increasingly attractive. And the retreat from its late 2021 surge makes me wonder if I’m looking at one of the best value FTSE 100 shares now.
I rejected Rolls-Royce in the past, for several reasons. But am I now seeing good reasons to change my mind again, and move back towards Rolls being a good long-term investment?
Two things did put me off buying the shares in 2021.
I thought investors got back in too early in the Covid-19 pandemic. I am a big proponent of buying shares when the market has crashed. And I did buy cheap shares during the market slump. But I only bought ones I thought were unfairly depressed.
I reckon the Rolls-Royce share price fall was justified. The global lockdowns greatly damaged the company’s market. And there’s no way I would buy until I could see the company performing better than its share price suggested.
Investors were too keen to see the recovery coming. And the winter 2021 resurgence turned out to be unsustainable. Still, with the RR share price back down in the dumps again, that barrier has been eliminated.
RR share price fall
The latest slump follows the start of the Russian war in Ukraine, which has had another detrimental effect on aviation. But I don’t really see a long-term hit to Rolls-Royce’s prospects there.
The second thing I don’t like is debt. Rolls-Royce beefed up its balance sheet to get through the crisis, but that left it with year-end debt of £5.2bn. That worries me. But if the company can get back to growing its earnings, it could start to look less problematic.
Earnings of 0.11p per share for 2021 was, at least, positive. Analysts have a consensus forecast of around 4.3p for the current year, with 5.8p for the year after. If those come close to reality, we’d be looking at a price-to-earnings multiple of 22 for 2022 and 16 for 2023, based on the current Rolls-Royce share price.
Attractive valuation?
That, I think, is heading towards an attractive valuation. Industry experts don’t expect aviation to get back to full strength for a few more years yet. So Rolls could have four or five years of strong earnings growth ahead of it. And that could bring the P/E tumbling down.
Rolls-Royce looks lowly valued to me. But a low valuation is not necessarily a bargain valuation, if the risk is sufficiently high. And there is big risk here. In addition to what I’ve already mentioned, Covid cases are picking up in China. And long-serving CEO Warren East is stepping down.
The big question for me is whether the valuation is low enough to make it worth taking the risk. Right now, I think Rolls-Royce could be on the cusp. But I’ll wait at least until I see how the first quarter goes, even though part of me expects the RR share price to be among the FTSE 100’s best performers in the next 12 months.