The Rolls-Royce (LSE:RR) share price is still under £1. That looks cheap. But with around 8.37bn shares outstanding, the current share price values the entire company at around £7.89bn.
I’ve been seeing a lot of optimism around Rolls-Royce shares at the moment. As an investor looking at UK stocks, though, I think that I can do better. One FTSE 100 stock that I think is more attractive than Rolls-Royce is Rightmove (LSE:RMV).
Valuation
Rightmove’s share price is currently around £6.37. That implies a price of roughly £5.37bn for the entire company. But the valuation story is a bit more complicated than just the share price.
In addition to paying £7.89bn to acquire the company, an investor in Rolls-Royce would also take on around £3.5bn in net debt. Adding that to the price gives a total outlay for an investor of around £11.3bn.
Rightmove, by contrast, has enough cash on hand to cover all of its debts. An investor buying Rightmove would acquire around £37m in net cash. Subtracting this from the market cap leaves a net outlay of around £5bn for Rightmove.
From an investment perspective, then, Rolls-Royce is slightly more than twice as expensive as Rightmove. The question for me is therefore whether or not Rolls-Royce is likely to produce more than twice as much cash as Rightmove in the future. I think this is unlikely
Efficiency
The reason that I doubt that Rolls-Royce can generate more than double the cash that Rightmove can is that Rolls-Royce is a more expensive business to run.
The company has around £5.1bn in net property, plant, and equipment and uses around £500m per year. Last year, it used these assets to generate around £120m in net income.
Rightmove is much more efficient. It has around £12m in net property, plant, and equipment and uses around £800,000 per year. Last year, the company used these assets to generate around £183m in net income.
In other words, Rightmove is a more efficient business than Rolls-Royce is. While Rolls-Royce clearly has the capacity to generate more cash, I believe that the amount of cash that the company will need to maintain its operations will mean that Rightmove shares prove to be a better investment for me over time.
Conclusion
Overall, I think that Rightmove is a superior offering at current prices. In the near future, I think that there’s risk here, though.
The Rolls-Royce share price might get a bit of a push. The company’s exposure to nuclear power generation aligns well with the UK government’s energy intentions and might generate some excitement, pushing the stock higher.
Equally, Rightmove shares might struggle a bit over the next few months as tighter mortgage lending weighs on the UK housing market. With a longer-term focus, though, I think that Rightmove’s lack of debt and superior efficiency make its shares more attractive, even with the Rolls-Royce share price below £1.
My plan is to follow Warren Buffett’s advice and use the pessimism around Rightmove to be greedy when others are fearful. I’m staying away from the optimism around Rolls-Royce, though, being fearful while others are starting to get greedy.