Rolls Royce shares took off on Thursday as the engine maker confirmed a solid year of progress in 2023 and set out attractive 2024 guidance.
With a 222% gain, Rolls Royce was the FTSE 100’s best-performing stock in 2023 by a country mile. In the 2024 year-to-date, the company has gained another 20% including today’s 8% rise.
Today’s full-year results justify strong gains in Rolls Royce shares and even provide scope for further gains. Underlying operating profit rose to £1.59bn in 2023 from £652m in 2022 and free cash flow surged to £1.29bn.
“What’s not to like in this Rolls-Royce update? Profit has doubled, cash flow is up and costs and net debt have come down. CEO Tufan Erginlilgic seems to have carried out the turnaround of the century, given shares are now trading at a six-year high and are 10 times higher than their Covid low,” said Adam Vettese, Market Analyst at eToro.
The fundamentals support future earnings growth, and there is nothing in this release that derails Rolls Royce’s ascendancy. This doesn’t mean unexpected external events have the potential to upset Rolls Royce’s growth trajectory.
Rolls Royce is being supported in part by a consumer choosing to allocate their discretionary spending to travel during the cost of living crisis and airlines bolstering their fleets to meet demand.
The company said they were targeting £1.7bn-£2.0bn Operating Profit in 2024 and Free Cash Flow of £1.7bn-£1.9bn.
“Heading into the new year, the group continues to benefit from sector-wide tailwinds like a huge backlog of plane orders and pent-up consumer demand for travel, meaning there’s set to be more of the group’s market-leading engines on wings,” said Aarin Chiekrie, equity analyst, Hargreaves Lansdown.
“Given that a large chunk of its revenue comes from servicing those engines, with business based on how long those engines spend in the air, investors should be pleased to see so-called engine flying hours (EFH) rise to 88% of 2019 levels last year. That figure’s set to soar to new heights this year, with the group expecting EFH to hit 100-110% of 2019 levels.”
Rolls Royce CEO Tufan Erginbilgic’s turnaround strategy must be applauded. He took the controls at Rolls Royce in early 2023 amid geopolitical tensions and economic head-winds, and has set Rolls Royce on a clear path to shareholder returns.
“Our transformation has delivered a record performance in 2023, driven by commercial optimisation, cost efficiencies and progress on our strategic initiatives. This step-change has been achieved across all our divisions, despite a volatile environment with geopoliticaluncertainty, supply chain challenges and inflationary pressures,” said Rolls Royce CEO Tufan Erginbilgic.
