Very few FTSE 100 shares have put in the sort of performance we have seen from Rolls-Royce (LSE: RR) over the past few years. Over five years, the aeronautical engineer’s share price has soared 686%.
On a shorter timeframe things look even more impressive, hard though that may be to imagine.
At the end of September 2022, for example, the Rolls-Royce share price was in pennies. It has since grown by 1,000%. The dividend is back too.
After crashing between mid-March and the first week of last month, Rolls-Royce shares have soared 22% over the past month alone. Could this indicate they are back to the sort of form seen in past years – and ought I snap some up today?
Bouncing back, but impressively so
The simple analysis might be that that 22% gain is not as strong an indicator as it might seem.
The share price fall had been due to economic uncertainty driven by US tariff policy, both in terms of its own uncertainty and also the potential negative impacts for Rolls with its heavily globalised business model. So, the rise has simply been undoing the fall that hit the Rolls-Royce share price when the tariffs scared markets.
Still, while that sounds simple enough, I think the quick bounceback is an impressive sign of the confidence investors now have in Rolls.
After all, it does do a large part of its business in the US and global tariff disputes remain a clear, substantial risk to its medium-term profitability. Yet, after just a few weeks, the share was basically able to shake that off.
A trading statement last week saying the FTSE 100 firm expects to offset the impact of announced tariffs undoubtedly helped. But while Rolls’ previous managements were inconsistent at delivering results for decades, it seems that the current management enjoys such confidence from shareholders that when it says the tariffs will be offset, the expectation is set fully.
The share could go higher
That concerns me as a potential investor.
Do not get me wrong – I like a reliable management. If I can take them at their word when they say what they expect to achieve, it makes life easier for everyone.
But part of the turnaround in the Rolls-Royce share price over recent years has resulted from strengthening business operations and aggressive goal-setting for financial performance. The expectation that tariffs can be offset suggests that, even now, the company continues to feel confident about further potential for cost-cutting.
Customers of the pricy engines may be reading that, though, and wondering whether they can negotiate harder with Rolls in future if the company has such financial slack. That could be bad for profits.
For now, the outlook looks robust. Customer demand is high and Rolls is solidly profitable. If it keeps reporting strong news, I reckon the Rolls-Royce share price could go even higher.
But at 26 times earnings, it already looks pricy to me. The company remains highly vulnerable to risks it cannot control, such as a sudden collapse in aviation demand due to another pandemic or terrorist attack.
I prefer a higher margin of safety when investing, so will not buy the share at its current price.
