The Rolls-Royce (LSE: RR.) share price has been on fire lately. Shares in the aerospace and defence company have climbed from £0.93 per share at the start of 2023 to £6.07 as I write on 31 January. That represents a gain of over 550% in the space of just over two years.
Investors have been clambering to buy in and the company’s market cap has swelled to over £50bn in the process. Having nearly doubled in value throughout calendar year 2024, can the Rolls-Royce share price do it again?
Surging valuation
CEO Tufan Erginbilgiç has been busy making changes. He has embarked on a mission to slash costs, boost efficiency, and increase profitability since taking over in January 2023.
In October last year, the company announced 2,500 job cuts in pursuit of these objectives. The company’s half-year operating margin rose by 4.4% to 14%, with the biggest gain in its civil aerospace unit, which delivered an operating profit margin of 18%.
Investors appear to be the beneficiaries, with the company announcing a dividend for the first time since 2020. Management upgraded guidance for full-year underlying operating profit of between £2.1bn and £2.3bn in 2024, potentially some £300m above its own February predictions.
Up, up, and away?
So, it’s been a strong couple of years for the Rolls-Royce share price. I think there are a few key factors that could propel the company’s market cap further in 2025.
If the recovery in travel continues, that would be good news for the engine maker and its revenue potential. Of course, higher revenues is just one piece of the puzzle.
Management will need to keep trimming the fat to keep costs under control and deliver more profitability. Further profit upgrades, or increases to its forecast dividends, could also boost the share price.
In terms of medium-term growth, I think the company has some exciting initiatives in the wings. One of them is its next-gen UltraFan engine with its new architecture and lightweight design combining with the world’s most powerful aerospace gearbox to create a potential game changer.
At the forefront of technological change, commercial deals for this and other technologies like nuclear energy could represent lucrative future growth avenues.
Key risks to growth
Of course, no investment is without risk. Management has made no secret of the supply chain challenges it is facing at the moment. Further or worsening disruption could impact on profitability and be a nasty surprise.
Then there’s the macroeconomic environment. Global geopolitics is delicately poised and economic uncertainty is rife, with concerns around inflation and interest rates. This means there could be an unexpected decline in demand, which investors would surely view unfavourably.
My verdict
Rolls-Royce has been a big winner, but it’s no longer the cheap turnaround play it was a couple of years ago. Investors need to decide whether the company can keep up its impressive momentum.
If it keeps improving profitability and pushing into new markets, the share price could keep climbing. But if challenges mount up and the Midas touch escapes Erginbilgiç, 2025 could be a bumpier ride.
I’m not currently invested in the stock. I don’t have the spare funds to invest at the minute, but I think I’ll be putting any spare cash to work in other defensive sectors like pharmaceuticals before I jump on the Rolls-Royce train.
