Rolls-Royce (LSE:RR) shares have extended to new heights. It’s quite phenomenal how far the stock has surged over the past 2.5 years. However, Donald Trump’s US trade policy announcement saw the stock slip after 2 April. Investors who bought the stock on 3 April will have seen their investments rise by 10% over the last month and a half. In other words, £10,000 would have become £11,000.
Why are tariffs important?
Trump’s tariffs are an unavoidable issue for Rolls-Royce because the company relies heavily on transatlantic trade and has significant manufacturing operations in both the UK and the US. Rolls-Royce produces a large proportion of its engines and aerospace components in the UK, but it also employs around 6,000 workers across 11 US sites and has invested over $1bn in its Indianapolis facility. The company’s UK operations, such as the Filton plant, are vital for both civil and defence programmes, but the US remains a key market and production base.
Trump’s recent tariff hikes — 10% on most UK goods, with additional levies on sectors like steel and automobiles — prompted Rolls-Royce to consider shifting more production to the US to avoid punitive costs and maintain access to American customers. This would help protect the supply chain and ensure competitiveness as tariffs threaten to erode margins and disrupt established trade flows.
Over the past month, the tariff landscape has shifted on several occasions. The touted ‘US-UK trade deal’ wasn’t so much a trade deal, but a reduction of some tariffs. However, this has stoked optimism among UK manufacturers, including Rolls-Royce, as it signals a willingness to ease trade tensions and preserve jobs.
Personally, I believe the recovery is a little overdone. The fact that the blanket 10% tariff remain in place is a cause for concern. Despite this, the prospect of closer trade ties has lifted sentiment in the sector, offering hope for greater stability and future growth.
What the numbers say
Rolls-Royce currently trades above sector averages, with a forward price-to-earnings (P/E) of 31 times versus the sector median of 19.3 times. That’s a premium of over 60%. I think this higher valuation is justified by the company’s formidable competitive advantages: a dominant position in civil aerospace, long-term service contracts, and significant intellectual property that create high barriers to entry for rivals.
The company’s growth outlook is robust, with consensus estimates pointing to earnings per share (EPS) growth of 48.6% in 2025 and 24% in 2026. As earnings rise, Rolls-Royce’s P/E is projected to fall to 25 times by 2026, indicating improving value over time. The recent return of dividend payments and a £1bn share buyback further highlight management’s confidence in future cash generation.
In summary, Rolls-Royce’s sector-leading valuation appears well supported by its unique moat and accelerating growth trajectory. Personally, I’m a little wary of adding to my position, which I initiated more than two years ago. However, I think that wariness reflects the current trade and market volatility more than the company’s credentials.
