After the Rolls-Royce share price hit an all-time high, is it finally too late to buy?

The Rolls-Royce Holdings (LSE: RR.) share price has been hovering round its highest-ever level for the past month. It reached the record of 1,111.5p on 14 August. And at the time of writing, it’s only a bit back from that at 1,087p.

Since coming out of the pandemic crunch, Rolls-Royce shares have climbed a wall. It has to be the most impressively sky-rocketing share price recovery I’ve ever seen.

To get another angle on the scale of the achievement, Rolls reached around 445p at its pre-crash best in 2013. Today the share price is around two-and-a-half times that.

Light at the end

At the time of the 2020 stock market crash, things looked bleak for Rolls-Royce. Many of us even feared the great British engineering firm might not survive.

But with hindsight, that crisis might have been the best thing that could have happened. It forced a refocus and restructuring, under new management, that had been badly needed. Rolls had been in trouble even before 2020. At the end of 2019, the share price had fallen close to 50% from that previous record high.

In my view, we’re looking at a genuinely transformed company today, with greater potential than the Rolls-Royce of old. But at what price?

Remember, billionaire investor Warren Buffett famously said: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” I reckon Rolls-Royce might well tick Buffett’s ‘wonderful company’ box. But the ‘fair price’ thing is the big question.

Fair price?

It all comes down to valuation. And right now, Rolls-Royce has a forward price-to-earnings (P/E) ratio up at 42 — and some forecasters have it even higher. Does that suggest a fair price? It has to depend on an individual investor’s take. Are we convinced by the long-term earnings growth prospects here?

One thing I don’t see is sufficient growth in the aero engine business to justify the price tag — although that business has to be worth a fair bit. But there’s clearly also a premium here for the jam-tomorrow world of the small nuclear reactor industry.

Now, that is a promising business. And Rolls already has its feet in a few tasty-looking doors. But the profits are sure to be some way ahead, and we can only guess at the potential today.

Forecasts do suggest a 20% rise in earnings per share between 2024 and 2027, but that’s by way of a small dip this year. And there’s one thing I look for in a stock like this, which I’m not seeing here.

Better value ahead?

I’m talking about safety margin. Warren Buffett likes a large safety margin in the valuation of his stocks, and I do too. And as I don’t see enough, I’m not buying.

That doesn’t mean the Rolls-Royce share price won’t keep hitting new records, mind. But I’ll hold out hope for future dips.

The post After the Rolls-Royce share price hit an all-time high, is it finally too late to buy? appeared first on The Motley Fool UK.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Rolls-Royce Plc. 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.