Image source: Rolls-Royce plc
Over the past five years or so, Rolls-Royce Holdings‘ (LSE:RR.) shares have been the darling of the UK stock market. Since December 2020, they’ve risen in value by a staggering 825%.
But it’s the future that really matters. Unfortunately, nobody has a crystal ball, which is why — when it comes to choosing stocks — opinions differ. Personally, I think this is a good thing. I reckon we become better investors if we review both sides of an argument and consider views that might challenge our own.
And what better way to do this than look at articles published on The Motley Fool website?
That’s why, since the start of December, I’ve been studying the opinions of my fellow Fools on Rolls-Royce.
What are they saying?
These include Stephen Wright, who employed discounted cash flow techniques to estimate by how much the group’s earnings would have to grow over the next 10 years to justify its current share price. Acknowledging the flaws with these types of calculations, he came up with a figure of 11.7%. Stephen thought this was “challenging but achievable”. He concluded: “So while it’s not the most overvalued stock on the market, I don’t see it as an obvious bargain to consider”.
Royston Wild reckons the stock’s generous forward price-to-earnings multiple means it “may struggle to keep rising”. Edward Sheldon agrees. He wrote that the current valuation “doesn’t leave much room for error”.
Alan Oscroft has some concerns that the group might be experiencing an “AI bubble factor” caused by excitement surrounding the anticipated growth in “energy-hungry data centres”. Rolls-Royce is hoping to meet some of the expected additional demand for electricity through its small modular reactor (SMR) technology. But it’s yet to be proven to be commercially viable.
Any other views
Finally, there’s the ‘brilliant and insightful’ Fool called James Beard. Never heard of him? No, nor have I. Anyway, a week ago (2 December), he thought a case could be made for arguing that the Rolls-Royce share price was 26% overvalued. This was based on the current stock market valuation of RTX Corporation, the world’s largest aerospace and defence group.
It therefore seems as though there’s a consensus here. All five writers appear to agree that the stock’s expensive or, put another way, not cheap. But there’s a difference of opinion among these authors – and that’s the beauty of this website – as to whether the stock’s still worth considering as a good long-term investment.
Is it?
Despite its disappointing dividend and concerns over its valuation, I think it is worth considering.
And analysts, who have a 12-month share price target that’s 15% higher than today’s value, seem to agree. Looking further ahead, I have confidence that its SMRs will work. That’s because the group has an impressive heritage of engineering excellence. This has helped it deliver a series of post-pandemic earnings upgrades which have proven the doubters wrong. I’ll admit, I was one of the sceptics.
Importantly, each of its three divisions – aerospace, defence and power systems – are growing. And increased air travel, a more uncertain world, and the urgent need for extra electricity capacity, are likely to present further opportunities for growth.
That’s why I reckon Rolls-Royce is still a sound long-term investment to consider, even though it’s not the only opportunity on my radar.
