Rolls-Royce shares: 5 things to know right now

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Rolls-Royce (LSE: RR) shares have been hammered over the last year or so. As a result, the stock is currently attracting value hunters (last week it was the fourth-most purchased stock on Hargreaves Lansdown).

Personally, Rolls-Royce shares don’t strike me as a good investment right now. Here are five things to know about the aerospace and defence company.

Profits have slumped

Let’s start with profitability, because it has tanked. Indeed, in Rolls-Royce’s recent half-year results, for the six months to 30 June, the company posted an underlying operating profit of £125m. This was down from £307m a year earlier.

So clearly, the company is experiencing some challenges right now. “The external environment remains challenging, with the war in Ukraine, inflationary pressures, and supply chain constraints all impacting our business. We expect these issues will persist into 2023”, said management in the results.

Analysts are downgrading earnings forecasts

On the back of the poor results, City analysts have been slashing their earnings per share (EPS) forecasts for the full year. Over the last month, the consensus EPS forecast for 2022 has fallen by 0.4p to 1.5p.

This is an issue from an investment point of view. That’s because analyst’s earnings downgrades can have a negative impact on a company’s share price.

Rolls-Royce shares aren’t cheap

Looking at that consensus EPS figure for 2022, Rolls-Royce shares certainly aren’t cheap right now. At the current share price of 80p, the forward-looking price-to-earnings (P/E) ratio here is about 53. That’s a very high valuation.

Even if we use next year’s earnings forecast of 4.2p in the equation, the P/E ratio is still nearly 20. I see that as high as well, given the company’s poor long-term track record in terms of profitability and its high level of debt (net debt of £5.1bn on the balance sheet at 30 June).

Brokers are slashing their share price targets

Given the high valuation, we’ve seen some analysts cut their price targets for Rolls-Royce shares recently.

For example, in early August, analysts at JP Morgan cut their price target to 60p from 70p. Considering that Rolls-Royce currently trades at 80p, that implies downside of around 25% right now.

One insider does see value here

It’s worth pointing out that there are some positives here.

One thing that stands out to me on the positive side is that in early August, Chair Anita Frew bought 150,000 Rolls-Royce shares at an average price of 82.33p per share.

This director dealing suggests that the insider is confident in relation to the company’s outlook, and that she expects the share price to rebound at some stage in the future.

Better stocks to buy

Weighing everything up though, this looks like quite a risky stock, to my mind. As a result, I won’t be buying it for my own portfolio any time soon.

The company may be able to turn things around eventually. However, in my view, there are much better stocks I could buy today.

The post Rolls-Royce shares: 5 things to know right now appeared first on The Motley Fool UK.

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Edward Sheldon has positions in Hargreaves Lansdown. The Motley Fool UK has recommended Hargreaves Lansdown. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. 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.