I’ve just bought a few more Rolls-Royce Holdings (LSE:RR.) shares using my Stocks and Shares ISA. I’m hoping that the aerospace and defence group will benefit from improved earnings, as well as investors taking more of an interest in UK shares in general. In my opinion, the London Stock Exchange is undervalued compared to its peers, and could benefit from the current turbulence in the United States.
Uncertain times
President Trump’s erratic policies are causing mayhem and are in danger of tipping the country into recession. JP Morgan claims there’s a 60% chance this will happen in 2025. This suggests the White House’s current fixation with tariffs might have some unintended consequences.
Since 1950, the United States has experienced 10 recessions. It used to be said that when America sneezes, the rest of the world catches a cold. But we live in different times now.
President Trump’s isolationist policies have caused the dollar to fall and a sell-off in US government bonds. Although the FTSE 100’s been affected by the uncertainty surrounding the announcements on ‘Liberation Day’, it’s down far less than the S&P500. Investors appear to be losing confidence in America and could turn elsewhere
And if the ‘rising tide lifts all boats’ mantra proves correct, Rolls-Royce shares should also benefit. This is one of the reasons why I recently took advantage of the pullback in its share price — the stock’s currently 8% below its 52-week high.
And I’m not alone. Of the 17 brokers covering the stock, 12 rate it a Buy, four are Neutral and one is advising its clients to Sell.
A strong growth story
Over the next three financial years, the consensus forecast is for underlying earnings per share of 23.56p (2025), 27.72p (2026) and 30.96p (2027). If realised, the 2027 figure would be 50% higher than the amount reported for 2024 (20.29p).
At the moment, the company’s valued at around 36.9 times historic earnings. If this continued, the stock could be changing hands for 1,142p when its 2027 results are finalised. That would be a 52% premium to today’s price.
I’m not claiming the company’s shares are cheap. But it’s able to justify this above-average valuation because it continues to grow and exceed expectations. On 27 February, the group upgraded its ‘mid-term’ (2028) targets for underlying operating profit to £3.6bn-£3.9bn. For comparison, this was £2.5bn in 2025.
Much of this growth’s expected to come from additional defence spending and increased engine flying hours. And looking further ahead, the group’s also likely to benefit from the adoption of mini nuclear power stations (small modular reactors) that it’s at the forefront of developing.
Final thoughts
But the group still faces some challenges. During the pandemic, we saw how its financial performance was severely impacted by flight restrictions. Although this was probably a once-in-a-generation event, it does show how dependent the group is on the aviation industry.
And because of its healthy valuation, if the group’s results fail to live up to expectations, there could be a significant market correction.
However, after weighing up these pros and cons, I’ve decided to add more of the stock to my Stocks and Shares ISA. Other growth investors could consider doing the same.
