This beaten-down blue-chip is forecast to grow 4 times faster than the Rolls-Royce share price
The Rolls-Royce (LSE: RR.) share price remains a thing of wonder. Itâs been by far the most exciting FTSE 100 stock over the last five years, rocketing 1,095%. Itâs maintained its momentum against the odds, doubling again over the last year.
Opportunities like this donât come around often but when they do, portfolios and retirements can be transformed.
At some point though, it must surely slow. Rolls-Royce is now a £93bn business and trades on a price-to-earnings ratio of 56.8. Thatâs far above the FTSE 100 average of roughly 18.
FTSE 100 high-flier
Yet CEO Tufan Erginbilgiç keeps delivering. Yesterday (13 November), the group reiterated its confidence in hitting underlying full-year operating profits of between £3.1bn and £3.2bn, reporting strong progress across its three divisions despite supply chain bottlenecks.
Its civil aerospace arm has had a run of large engine orders from carriers in India, Malaysia, and Ireland. Defence activity remains robust, and demand from data centres and governments is driving its power systems arm.
The board confirmed its target for free cash flow of £3bn to £3.1bn. Full-year numbers land on 26 February.
There are risks, aside from that heady valuation. Missing those targets would hit the share price hard, given that sky-high P/E, and the group also needs to show progress on long-term projects such as small modular reactors.
Brokers share my caution about future share price gains. Consensus forecasts deliver a one-year median target of 1,208p, a modest 7.85% above todayâs level considering its recent performance. Today, the potential risks are starting to outweigh the potential opportunities. Investors should only consider buying with a long-term view.
Mondi is priced to grow
Investors hunting for the next recovery stock today should check out FTSE 100 paper and packaging group Mondi (LSE: MNDI).
Its shares are down 26% over the last year and 50% over five, as the slowing global economy means fewer orders and lower demand for packaging.
Yet Rolls-Royce was in meltdown once and recovered. I canât imagine Mondi will deliver quite the same level of excitement but broker forecasts are now more upbeat for Mondi than for Rolls.
Fourteen analysts produce a median 12-month share price target of 1,107p. Thatâs almost 30% above todayâs 853p, and four times the projected growth rate of Rolls-Royce.
The range of forecasts is wide though, from a high of 1,507p to a low of 760p, so thereâs plenty of uncertainty.
In marked contrast to Rolls, Mondi looks cheap on a P/E of 11.68. That reflects its troubles but I think it looks like an attractive entry point for patient value investors.
Dividend income appeal
Mondi boasts a bumper trailing dividend yield of 7%, far above Rolls-Royceâs 0.5%. However, it could be trimmed as earnings continue to slide. On 3 October, Q3 earnings came in at â¬223m, that’s down from â¬274m in Q2 and â¬290m in Q1.
Management expects trading conditions to remain difficult, amid falling prices, weakening demand, and oversupplied markets.
While Rolls-Royce is firing on all cylinders, Mondi is still at the stage of cutting costs and delaying investment. It takes nerve and patience to build an early position in a troubled business but as Rolls-Royce shows, once the tide finally turns, the gains can be dramatic. Investors might consider buying with a long-term view, but donât expect a Rolls-Royce style rally. They donât happen every day.
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Harvey Jones has positions in Rolls-Royce Plc. 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.
