I just bought more Rolls-Royce shares. There’s 1 reason why

Last Friday (23 October), I bought some more Rolls-Royce (LSE: RR.) shares for my investment portfolio. At the time, they were trading for about 1,210p – roughly 24% below their 52-week highs.

Now, the double-digit drop in the share price was naturally part of the reason I made this move. However, there was another factor that was far more influential in my decision to add to my position here.

Rivals are raising their guidance

The main reason I decided to buy more shares in Rolls-Royce was that recent earnings from US rivals have been very strong. Last week, we had results from RTX Corp and GE Aerospace and both companies beat estimates and raised full-year guidances.

RTX Corp’s the world’s largest aerospace and defence company. Like Rolls-Royce, it produces aircraft engines (such as Pratt & Whitney turbofans) alongside advanced defence and aerospace systems.

For the third quarter, its revenue was up 11% year on year to $25bn while its earnings per share (EPS) were up 33% to $2.26 (versus analysts’ forecast of $1.78). At the end of the quarter, the company had a $340bn backlog.

GE Aerospace is a global leader in jet engines and integrated systems for commercial, military, business, and general aviation aircraft. So it’s similar to Rolls-Royce in many ways.

For Q3, it generated revenue of $13.3bn, up 18% year on year. Adjusted EPS came in at $2.25 versus Wall Street’s forecast of $2.

To my mind, these results are a good sign for Rolls-Royce. If the company’s performing as well as its peers, we should be looking at strong growth in revenue in its next trading update (scheduled for 12 November) and perhaps an increase to guidance.

The shares could keep falling

Now obviously, there’s no guarantee that my purchase near 1,200p will work out in the near term. We could see the share price continue falling.

Make no mistake, high oil prices are a major risk for Rolls-Royce. If airlines start to aggressively cut flights to reduce costs, Rolls-Royce could be negatively impacted given that a large chunk of its revenues comes from engine servicing.

Another risk is sentiment around the AI trade. Given that Rolls-Royce develops power solutions for data centres, a further sell-off here could put pressure on the company’s share price.

Algorithmic selling activity is also potentially a risk. Now that the shares are falling, we could see automated strategies trigger further selling, creating a self-reinforcing downward spiral.

Long-term potential

I’m a long-term investor however. And taking a five-year view here, I see plenty of potential given the company’s exposure to defence, AI, and nuclear energy.

And with the forward-looking price-to-earnings (P/E) now back in the mid-20s, I think the shares are reasonably valued. In my view, they’re very much worth considering at current levels.

Should you invest £5,000 in Rolls-Royce Plc right now?

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Edward Sheldon owns shares in Rolls-Royce.