I have written several articles saying I would be happy to buy Rolls-Royce (LSE: RR) shares. These were written before the company published its latest set of results. They were also published before the geopolitical situation deteriorated.
Clearly, a lot has changed over the past week.
However, my opinion of the company has not changed that much. I think the business will have to deal with some significant challenges over the next year. However, it has already pulled through the most devastating pandemic in recent memory. It emerged stronger on the other side from this crisis. I think it has the fight left in it to move through the current situation.
The outlook for Rolls-Royce shares
Before I continue, I should note I do not think it is going to be an easy passage for the company over the next few years. There is no denying it is facing some significant challenges.
The global aviation industry is still recovering from the pandemic. What’s more, the war in Eastern Europe will almost certainly have an impact on the company’s aviation business. As of yet, it is not possible to tell how much of an impact the situation will have on the organisation’s bottom line.
Still, following the group’s latest results release, City analysts believe the enterprise will report a profit of nearly £400m in 2022. That is a significant turnaround from 2020’s loss of £3.2bn. Analysts are also projecting further growth in 2023. They are expecting a profit of £630m for the year.
Based on these projections, the stock is trading at a 2023 forward price-to-earnings (P/E) ratio of 14. By comparison, many of the company’s international peers are trading at multiples of 20 or more.
As such, based on these numbers, I could argue the stock is significantly undervalued compared to its growth potential over the next few years.
However, considering all of the challenges the company is currently having to work through, I am not willing to pay over the odds for Rolls-Royce shares. To put it another way, I think the stock deserves an uncertainty discount.
Buy, sell, or hold?
After taking all of the above into account, I still think Rolls-Royce shares look attractive as a speculative recovery play over the next few years.
As such, I would be happy to buy the stock for my portfolio today. And if I already owned it, I would continue to hold to see how its transformation develops. If the firm starts to struggle again, I will review my position. But if profits continue to grow and management hits analysts’ growth forecasts over the next couple of years, I will add to my holding.
Unfortunately, as there are so many moving parts, I cannot make a concrete prediction about the company’s outlook over the next few years.
The post Should I avoid Rolls-Royce shares? appeared first on The Motley Fool UK.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
