Rolls-Royce: Valuations Now Necessitate An Unprecedented Earnings Boom
Summary
- Rolls-Royce's stock has risen 15x since October 2020 due to multiple expansion due to declining default risk and optimism over power generation capabilities.
- The company's price to sales ratio is now at record highs, and based on this metric's relationship with subsequent returns in the past, it implies deeply negative 10-year annualised returns.
- The company's balance sheet remains negative by GBP3.6bn and with air travel still representing the bulk of earnings, the company remains as exposed to recession as ever.
- The potential for growth in Small Modular Reactors provides significant upside risks, but current valuations mean investors now rely on an unprecedented earnings boom in order to generate strong returns.
Michael Derrer Fuchs
Since its low in October 2020, Rolls-Royce (OTCPK:RYCEY) has performed spectacularly, rising 15x as its price to sales ratio has rebounded from record lows of just 0.15%. The entirety of these gains has been the result of
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