Following a rally after its H1 results, Rolls-Royce's share price fell 11%, so should I buy?

Rolls-Royce's (LSE: RR) share price has fallen by around 11% since 1 August in the 12 months it has been trading at £5.02. On the same day it released its H1 2024 results.

Part of the reason for this was the widespread collapse of FTSE 100. This coincided with similar declines in other major world indices on growing fears of a US recession.

Prior to this the stock had dropped to what I think investors thought was little value left in it.

It's an understandable view, as the shares have risen by 127% since 23 October 12-months traded below £ 1.97.

However, it is important to remember that a stock can still have a lot of value left in it even after a big price increase. This applies to Rolls-Royce, in my opinion.

Still not that important?

Shares currently trade at just 16.8 on the price-to-earnings ratio (P/E).

This is such a low ratio among its competitors, a P/E ratio of 34. This includes BAE Systems on 20.9, Northrop Grumman on 31.6, L3Harris Technologies at 36.7, TransDigm Group at 46.8.

Therefore, Rolls-Royce shares look very cheap on this basis.

But how much is a cash transaction? A discounted cash flow analysis shows that the stock is undervalued by 59% at the current price of £4.47.

Therefore, the fair value of the stock would be £10.90. It could be lower or higher than that, but it emphasizes to me how cheap it looks.

A strong growth idea?

Rolls-Royce's results for H1 2024 showed revenue up 18% to £8.182bn, from £6.95bn in H1 2023. Underlying operating profit jumped 74% to £1.149bn from £0.673bn, and operating margin increased to 14% from 97%.

During the same period, free cash flow increased by 225% to £1.158bn from £0.356bn, and return on investment increased to 13.8% from 9%.

As a result of these impressive gains, the company raised its guidance for the full year 2024 to £2.1bn-£2.3bn of underlying profit, from £1.7bn-£2bn. It did the same with its free cash flow guidance, raising it to £2.1bn-£2.2bn from £1.7bn-£1.9bn.

The risk in such growth of the company is that the delivery system and/or the quality of its products suffer. This can damage its reputation in the long run and ultimately affect sales.

That said, the business is still looking at an underlying operating profit of £2.5bn-£2.8bn, and an operating margin of 13%-15% by 2027. bn and a capital return of 16%-18% over that period.

Should I buy shares?

I already own another stock in this sector – BAE Systems — bought at a much lower price than now. Buying another would balance my portfolio.

However, if I didn't have this, I would be buying Rolls-Royce shares today. The stock still looks overvalued, which should boost the share price, in my opinion. This is likely to be fueled by strong projected growth in the coming years.

Such expansion should also gradually increase the share Rolls-Royce returned to the H1 results announcement, I think.