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Since late September, Rolls-Royce Holdings (LSE: RR.) shares have been on a tear. The share price has soared more than 70% since its 2022 low. But after such a strong surge, are the shares overpriced now?
Rolls-Royce shares slump
When I weigh up stock valuations, I always look back over share prices to see their history. After all, as one top London trader once told me, “The only action is price action.” In other words, the price you pay for an asset is the most important thing when buying.
For Rolls-Royce shares, their price action over the past five years has been a really rough ride. For example, on 3 August 2018 — 20 months before the coronavirus collapsed stock markets — this popular stock closed above 375p. Since then, the price has plunged dramatically, crashing to levels not seen since the depths of the 2000/03 market crash.
Here’s how the Rolls-Royce share price has performed over various time periods, based on Friday’s close of 110.2p:
| One day | -2.9% |
| 2023 YTD | +17.4% |
| One month | +18.1% |
| Six months | +26.5% |
| One year | -4.6% |
| Five years | -63.2% |
The shares are up by more than a sixth in 2023, lifting the famous engineering group’s market value to £9.2bn. However, though the share price is up more than a quarter in six months, it has lost nearly 5% over the past year. Even worse, it’s down nearly two-thirds over five years.
Too far, too fast?
At its 52-week bottom on 28 September, the Rolls-Royce share price collapsed to an intra-day low of 64.44p. With the price now at 110.2p, the shares have skyrocketed by more than seven-tenths (71%) from rock-bottom.
That’s a fantastic return. Indeed, I’m kicking myself that I didn’t buy this stock when I saw it crash below 70p. But have the shares risen too far, too fast? Have things really improved so much for Rolls-Royce in four months to justify such a huge leap in valuation?
Standing on a burning platform
On one hand, things are looking up for the engineer. For example, bookings for long-haul flights are booming again, which will help to boost its per-mile engine revenues from its civil aerospace division. Also, passenger numbers are heading towards pre-pandemic levels, which is good news for a group earning a big chunk of revenues from civil aviation.
The war in Ukraine has given the firm’s defence division a boost, with revenues climbing to over three-tenths (31%) of the total. In addition, the power systems division is also winning new contracts in the UK and Europe.
However, the group carries a hefty debt burden — net debt was £5.1bn in mid-2022. And on Thursday, Rolls-Royce’s new CEO warned employees that the company was a “burning platform” and its performance was “unsustainable“. Yikes.
I won’t buy Rolls-Royce shares right now
The new CEO then talked about restructuring, radical transformation, efficiency, and optimisation — code words for more job cuts, I feel. Frankly, this bleak and brutal outlook could hardly have motivated workers listening in Derby and elsewhere.
Summing up, Rolls-Royce faces heavy headwinds on the long road to recovery. And with its shares up over 70% from their low, they look too pricey to me. So I’ll pass at this price — for now, at least!
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