Image source: Rolls-Royce plc
During the week ended 4 April, of all UK stocks, Rolls-Royce (LSE:RR.) shares were the post popular among users of the Hargreaves Lansdown trading platform. Of the number of orders that were placed to buy shares, 2.38% were for the British engineering-cum-technology group. The value of these trades was 3% of all funds invested.
It’s not known when these deals were placed. But I suspect the majority of them were at the end of the week, when the stock suffered heavy losses as investors struggled to come to terms with the implications of President Trump’s tariffs.
I reckon many saw the share price pullback as an opportunity to buy a stock that’s continued to perform strongly since the pandemic.
Rolls-Royce shares closed the week at 659p. They were last at this level in February. And despite recovering a little — as I write on 9 April, the stock’s changing hands for 659.2p — they remain comfortably below their 52-week high achieved on 19 March.
On the other hand…
But dig a little deeper and a slightly different story emerges.
Among Hargreaves Lansdown’s clients, it was also the most sold stock, accounting for 3.17% of all sales orders, and 4.8% of the total value of these transactions.
It could be that some shareholders have decided to cash out after making some substantial gains.
Alternatively, it might be that the stock is a favourite of those who hold shares only for a few weeks (or days) in the hope of making a quick profit. But this isn’t investing, it’s speculating.
As Warren Buffett said in his 1989 letter to Berkshire Hathaway’s shareholders: “Our favourite holding period is forever”. And ‘his’ company hasn’t done too badly from following this approach — it’s now worth over $1trn!
In my opinion, those prepared to hold Rolls-Royce shares for several years could also be handsomely rewarded.
Growth prospects
In 2024, the group made an underlying operating profit of £2.5bn. By 2028, it’s expecting this to grow to £3.6bn-£3.9bn. Using the mid-point of this range, it implies an increase of 50%.
If achieved, earnings per share (EPS) will be close to 33p. At the moment, the stock trades on approximately 33 times its 2024 EPS. If this valuation multiple was maintained for the next three years or so, the share price could theoretically hit £11 by 2028.
And this could happen if the group grows as anticipated. That’s because most investors are looking at a company’s future prospects rather than what it’s achieved in the past.
But it’s important not to get too carried away.
Not least because President Trump may have thrown a spanner in the works. If there’s a global recession then the earnings figures referred to above are unlikely to be accurate. And air travel is particularly sensitive to a global slowdown. Fewer flights mean lower engine flying hours and less revenue for Rolls-Royce.
However, those investors looking to acquire shares in a quality company with an excellent reputation — at 18% less than where they were trading three weeks ago — could consider buying the stock.
