The Rolls-Royce (LSE: RR) share price is a thing of wonder. It just climbs and climbs and climbs. If this was an aircraft, it would have punched a hole in the ionosphere. Instead, it’s done the FTSE 100 equivalent.
Over three years, it’s up a staggering 853%. It continues to fly, rising another 83% in the past year. Although it was rattled by Donald Trump’s trade threats like every other stock, it has since regained altitude, climbing more than 20% in the last month.
Ultimate growth stock
That’s brilliant for those who booked their ticket towards the start of its stellar run. But those poor souls who missed the flight entirely may still be debating whether to climb aboard.
Many, understandably, fear the stock has flown too high too fast and will crash back down the moment they touch it. Sod’s law still applies beyond the ionosphere, scientists tell me.
Where does it go next? Nobody knows, but that doesn’t stop analysts from guessing. Fifteen have offered 12-month forecasts, and the median target is 820p. That’s a rise of about 6.5% from today’s 770p. Factor in the 1% yield, and the projected total return would be around 7.5%.
Two things to note here. First, forecasts are little more than educated guesses. Second, this one highlights an inevitable truth. At some point, Rolls-Royce must slow. Gravity will catch up eventually.
The valuation is dizzying too
The shares trade on a price-to-earnings ratio of 38. That’s high, even though it’s down from 44 times a couple of months ago. Global trade remains a worry and any economic slowdown might weigh on aviation demand. Supply chain snags or delivery delays in Civil Aerospace can’t be ruled out either.
However, as I write this, reports of a new UK-US trade deal have lifted the share price another 2% in early trading.
The latest numbers suggest there’s still plenty of fuel in the tank. Rolls-Royce reported a strong start to 2024, with chief executive Tufan Erginbilgiç expressing confidence in its ability to absorb tariff impacts. Underlying operating profit and free cash flow for 2025 are expected to land between £2.7bn and £2.9bn. Demand across all divisions was described as strong.
Civil Aerospace continues to fire, with large engine flying hours nearing 110% of pre-pandemic levels. Certification of a new Trent 1000 turbine blade is imminent and will double time on wing. Its Defence division is holding up as the Ukraine conflict drags on and Power Systems arm boasts a book-to-bill ratio of 1.5, driven by demand from data centres.
Long-term buy-and-hold
Rolls-Royce SMR is awaiting a major decision in June from Great British Nuclear on its small modular reactor bid. A thumbs down would be a blow.
This is a great British business, led by someone who clearly knows what he’s doing. I have no plans to sell my stake. And I think it’s still worth new buyers considering it for a diversified portfolio of UK shares.
They shouldn’t expect another 850% surge though. Unless they plan to hold for several decades, which is always the right way to buy shares.
Rolls-Royce has proved that FTSE 100 stocks don’t need to be dull and grounded. Some really can shoot for the stars.
