Rolls-Royce shares just fell 7%. Is it time to buy?

Shares in Rolls-Royce (London Stock Exchange: RR) fell 4.25% today (November 7). As I write, the shares are now 7% below their all-time high of 592p set a couple of days ago.

I invested in Rolls-Royce shares at 149p about 18 months ago and then topped up my stake at 450p in August. Both positions up. Should I take a third serving? Or will this test my luck?

What’s happened

Today’s fall follows an update to trading for the 10 months to October 31st. In this FCS index 100 The engine maker said flight hours at its key civil aerospace division rose 18% year-on-year, reaching 102% of pre-pandemic levels.

Rolls-Royce plans to deliver between 500 and 550 new engines this year, with significant orders coming from Hong Kong companies. Cathay Pacific Airways And El Al Israel Airlines.

The company said its defense division’s business remained strong, while its power systems division saw strong revenue growth driven by strong demand for data center backup systems.

CEO Tufan Erginbilgic commented: “The transformation of Rolls-Royce into a high-performing, competitive, sustainable and growing company continues at a rapid pace and intensity. The continued strong year-to-date performance gives us further confidence in meeting our 2024 guidance.“

This forecast calls for underlying operating profit of £2.1 billion to £2.3 billion and free cash flow of £2.1 billion to £2.2 billion. This compares to underlying operating profit in 2023 of £1.6bn on underlying revenue of £15.4bn. So we predict profit growth of at least 32%.

The dividend will also return this year, starting with a payout ratio of 30% of the base after-tax amount. benefitincreasing to 30%-40% every year thereafter.

Why did stocks fall?

Given this continued progress, why have stocks fallen? I think there are three reasons.

Firstly, the engineering giant warned back in August that supply chain problems would cost it between £150m and £200m this year. Management says the supply chain environment remains “testing“.

Further delays or shortages of critical components could impact engine production schedules and increase costs. So I would say this is the most obvious risk.

Secondly, Rolls expects engine flight hours in 2024 to be 100-110% of pre-pandemic levels. Thus, the 102% year-to-date figure reported today is close to the lower end of the forecast. If something goes wrong, you will have no wiggle room. The lack of full-year guidance is another risk to the share price.

Finally, the stock has exploded this year and, despite this small pullback, is still up about 85%. Attack price-earnings ratio the ratio for next year will be around 27, which is not that cheap.

Consequently, investors’ expectations are very high. And since full-year guidance was maintained rather than raised, there was likely some profit taking today.

My move

Looking at the update, as far as I can see there is nothing to worry about here. The company is on track to achieve what it promised, while long-term growth drivers remain strong. These include growing demand for international travel and rising defense spending as countries beef up their militaries.

As a long-term investor, I will not make any profit. I intend to hold my shares for the next few years.

But what about buying more? I don’t think this dip is big enough yet, but I’ll continue to watch for what I think will be one.