More attention is paid to Lloyds and Rolls-Royce than the majority of FTSE 100 stocks, yet these are the stocks we would look to buy first today.
Is Rolls-Royce stock the best deal on the FTSE 100?
Despite recent strength, the share price of Rolls-Royce still seems very low. But is the engineer a good deal or should investors stay away from it because of a value trap?
The share price of Rolls-Royce (LSE: RR) has recovered after a protracted period of stagnation in 2023. The FTSE 100 engineer has gained 36% over the last two weeks and is currently trading at three-and-a-half-year highs.
On paper, the company’s shares remain incredibly cheap at 210p each. City analysts predict that annual earnings will climb 194% in 2023. This leads to a price-to-earnings growth (PEG) ratio of approximately 0.2 in the future.
So, in August, should you add Rolls shares to our portfolio? Or would buying other inexpensive FTSE stocks make more sense for long-term value investors like you?
It is simple to understand why interest in Rolls Royce shares has soared. Brokers sharply increased their earnings projections for the company following two trade updates that occurred quickly one after the other.
As the travel industry continues to revive, the engine builder keeps experiencing highs. The firm’s management was even taken aback by the size of the comeback and the transformation program’s effectiveness.
As a result, Rolls increased its estimate of underlying operating profit for the entire year to between £1.2 billion and £1.4 billion. Up from a range of £800 million to £1 billion.
Additionally, recent days have seen an increase in free cash flow guidance from an earlier estimate of £600m to £800m to a range of £900m to £1bn.
The company, which is a significant commercial aviation engine servicer, is booming as the airline industry is recovering. In reality, the Civil Aerospace unit generated nearly half of its sales in H1 as large engine flying hours increased to 83% of pre-pandemic levels. Sales in the division increased by 38% year over year.
However, this is not the entire tale. Additionally, Rolls is having enormous success overseas. Between January and June, Defense revenue increased by 15% while Power Systems sales increased by 24%.
Also read: 3 Cheap FTSE 100 Stocks Under £100
Is Lloyds stock the best deal on the FTSE 100?
Despite the bank reporting £3.9 billion in pre-tax profits, Lloyds shares continue to trade below 50p. Is this a good time to purchase, or should investors avoid it?
Lloyds (LSE: LLOY) shares are still trading steadily below 50p. The banking stock is still trading below pre-pandemic levels despite recently announcing double-digit earnings growth and pre-tax profits of close to £4 billion. Is this a good time to purchase, or should investors avoid it? Let us look more closely.
Taking advantage of rising interest rates
Banks like Lloyds have finally transitioned into a more favorable lending environment as a result of the Bank of England hiking the cost of debt to fight inflation. Net interest margins have been quite tight as a result of artificially low-interest rates for more than a decade. But in light of the most recent increases, the continual flow of newly granted loans is beginning to show results.
The interest margin at Lloyds went from 2.9% to 3.1% in the previous year. Even though that might seem like a minor distinction, the company’s £451 billion loan book translates it into significant earnings growth. And as a result, the return on tangible equity for investors has increased to a respectable 16.6%.
This portends good both for the lending institution and its stockholders. Additionally, management could easily raise payouts by 15% from a year earlier thanks to growing cash flows.
One FTSE 100 stock that we would purchase today is not Lloyds or Rolls-Royce
Currently, two of the most traded firms in the UK are Lloyds and Rolls-Royce. Both would not, however, be the first FTSE 100 stock we would invest in today, despite all the publicity they have received.
Both of these businesses, which we like and are shareholders in, have problems. Although Lloyds may appear cheap, it has consistently moved sideways for years. Despite having a successful year, Rolls-Royce is still not profitable and has a ways to go before it can start paying dividends.
A growing company with no warning signs would be a superior investment, and for that, we are looking at pharmaceutical giant AstraZeneca (LSE: AZN). We believe it might be the finest stock to buy right now on the Footsie.
AstraZeneca is a business that is firmly on the upswing, in contrast to those other two. Revenue was up 25% and profits per share (EPS) was up 33% over the previous year. Analysts anticipate this to continue; some foresee EPS growth of 20% over the following five years.
CEO Pascal Soriot can be credited for this expansion. When he assumed control in 2012, he promised to emphasize R&D and innovation. The shares are up 282%, and AstraZeneca is now the largest company on the entire FTSE 100, so he is obviously doing something right.
In retrospect, focusing on innovation appears to be a wise decision. A pharmaceutical company depends heavily on its drug pipeline, thus it is in a wonderful position with a ton of high-yielding products.
Moreover, this is not the end of it. There are currently 178 additional pharmaceuticals under development, demonstrating that the company’s capacity to develop medicines that generate money is unaffected. We have to admit that this place’s future is promising.
The valuation is the cherry on top. It is true that AstraZeneca has been pricey recently; its price-to-earnings ratio only reached around 100 in the past year. However, the forward P/E is currently only 18, and the P/E facing backward is only 34. That seems extremely realistic to us for a company that is expanding this rapidly.
With a 52 forward P/E, US rival Eli Lilly appears to be significantly more pricey. GSK has a lower P/E ratio of 9, but its prospects are not quite as promising as those of its UK rivals.
Should you buy?
The corporation does have debt, therefore there are risks involved. Because of the high debt-to-equity ratio—about 85%—and the current high-interest rates, it may be more difficult to fund future research.
However, we believe we are looking at a wonderful purchase. Although companies like Lloyds and Rolls-Royce may be the focus of the market, we believe AstraZeneca to be the strongest stock of the three. If we had extra money today, we would invest.