The Rolls-Royce (LSE: RR) share price has just kept rising and rising (and rising). Its success has been agony for investors who sat on the sidelines, waiting for a dip.
Over the last three years, Rolls-Royce shares rocketed a scarcely believable 695%. Over two years, they’re up 423%. In the last year, 83%. And in the past three months? Another 37%.
Much of this comes down to the remarkable turnaround engineered by CEO Tufan Erginbilgic, who has restored belief and reignited growth. But what’s this? In the last week, the Rolls-Royce share price has dropped 2.79%.
Is this now a FTSE 100 bargain?
That’s hardly a game-changer obviously, given the extraordinary gains we’ve seen. And it’s not exactly surprising either, given the stock market volatility caused by Donald Trump’s tariff threats. Investors will have hoped for a bigger dip to buy into, but is this all they’re going to get?
The first thing to say is that second-guessing share prices is a dangerous game. I’ve no idea what will happen next. Nobody does.
Rolls-Royce is slightly cheaper than it was, but only marginally. Its price-to-earnings (P/E) ratio has slipped from around 43 times to 38. That’s still far above the FTSE 100 average of around 15 times though, meaning investors are pricing in a lot of future growth. If Rolls-Royce falls short, the share price could suffer more than just a dip.
There are reasons why Rolls-Royce shares could rise further. The business is investing heavily in small modular reactors (SMRs), or mini-nukes, which could revolutionise nuclear energy by making it cheaper and easier to deploy.
If governments, particularly in the UK, throw their weight behind the technology, this could open up a whole new revenue stream. But SMRs remain unproven, and there’s no guarantee of widespread adoption.
Global air travel’s booming again, and Rolls-Royce makes much of its money from servicing aircraft engines. The more miles flown, the more cash rolls in. But tariffs could send that into reverse.
Growth’s likely to slow
With tensions high in Ukraine and the Middle East, European nations are ramping up defence budgets. Rolls-Royce, which supplies military engines and other critical components, is well placed to benefit. But if Trump and Vladimir Putin deliver some kind of peace deal, cash-strapped European governments may rethink their plans.
Then there’s those tariffs. Rolls-Royce is fighting back by ramping up production at its US plants, which may mitigate the impact. But that will cost. Will it appease Trump? Nobody knows.
The 16 analysts covering Rolls-Royce have produced an average one-year share price target of 788p. That’s up just 4% from today’s 758p. Forecasts can’t be relied upon, but it suggests that after its enormous rally, the Rolls-Royce share price bonanza will slow. Given the uncertain geopolitical and economic backdrop, I wouldn’t be surprised.
But then, I don’t know. Nobody does. Investors buying Rolls-Royce shares today must accept the stellar gains are most likely gone. But with a long-term view, this rejuvenated British engineering hero’s still well worth considering, dip or not.
