Rolls Royce (RR) Shares Are Up 60% This Year. Are They a Buy?

The Rolls-Royce Holdings PLC (LON: RR) share price has risen almost 60% this year, driven by a massive recovery in the airline industry. The company makes aeroplane engines and is set to benefit from the rising demand for new aircraft and from maintaining the engines in older planes.

So, should you buy Rolls Royce shares? The short answer is no. After the massive runup in the company’s share price, I’d rather wait for a pullback before purchasing RR shares. Furthermore, the price chart below shows that the rally is running out of steam.

While the future outlook for the airline industry is quite bullish, there are a few factors about Rolls Royce that make me hesitant about purchasing the stock. First, the plane engine manufacturer had a massive debt pile of £3.3 billion at the end of 2022 and will have to work extra hard to reduce its debt burden and boost its balance sheet. 

The multinational aerospace and defence company also makes nuclear power plants and defence systems for governments. Still, its civil aviation is the main cash generator, given the recurring revenues from aeroplane engine maintenance fees. 

The firm has significantly invested in developing plane engines that use sustainable aviation fuels (SAFs). However, SAFs are an unproven technology whose future is uncertain. Some experts say that SAFs will never gain mass industry-wide adoption since the world cannot produce enough SAF to power all aeroplanes. 

Therefore, Rolls Royce might find itself in a situation where it has developed multiple SAF engines that nobody wants to buy simply because they cannot fuel the engines due to a lack of adequate supply of SAFs. 

Rolls Royce has also invested heavily in developing its small nuclear reactor (SMR) technology, but the firm might have difficulties getting government orders. Most countries are focused on clean and sustainable energy sources, and nuclear energy does not meet these criteria. 

Finally, Rolls-Royce recently appointed a new CEO, Tufan Erginbilic, who is keen on turning the company’s fortunes around. However, only time will tell whether he is the right person for the job. He pointed out that the firm had been underperforming for years and called for radical changes. 

*This is not investment advice. 

Rolls-Royce (LON: RR) share price. 

The Rolls-Royce share price has risen 59.84% this year as investor sentiment towards the firm shifted.