The Rolls-Royce Holdings (LSE: RR.) share price has climbed 670% in the past five years. But one thing worries me a bit.
Much of it was driven by the business recovering from its pandemic-linked crisis. And as we move ahead, it surely has to transition more and more to genuine new growth.
If the growth trajectory does slow, will that knock the share price? It really could. But I can see reasons for being optimistic about the long-term future.
Not just engines
Rolls-Royce’s small modular nuclear reactor (SMR) business is part of its New Markets segment. And that generated only £3m in underlying revenue in 2024.
But the UK government has just chosen Rolls-Royce to build the first SMRs in a £2.5bn programme over the next four years. It’s part of the decarbonisation process. And nuclear power has long been held up as a more rapid alternative to renewable energy sources.
A reactor has a far smaller footprint than a wind farm for the same capacity. Rolls’ SMRs are around the size of two football pitches, it seems (although it’s not clear which variety of football). They’re quicker and cheaper to build than conventional nuclear power plants, and should face fewer planning hurdles.
How much contribution could this make and when might we see profits? Without answering that question, CEO Tufan Erginbilgic says he expects the SMR business to grow “materially“. It’s definitely something that long-term investors should factor into their plans.
Well, engines too
The Civil Aerospace segment actually generated only half of Rolls-Royce’s revenue in 2024, which might suprise some. Stories we read are mostly headed with photos of aero engines, right? Including this one.
But industry observers are increasingly pointing to the next generation of engine development. Most notably, it’s all about high-bypass turbofans. And Rolls-Royce expects its new UltraFan to improve fuel efficiency up to 25%.
The pandemic derailed new aircraft plans at both Airbus and Boeing. And Boeing’s own problems are well publicised. But in the next decade they both seem likely to get their developments back on track.
Expanding markets
Whichever company engine makers deal with could potentially mean full order books for the next 20 years and more. And it looks to me like Rolls’ designs really are at the leading edge and well advanced.
The company had been focusing on the long-haul, widebody market. But it’s now talking about “the next design of the [UltraFan] engine that will position us strongly for a new generation of narrow and widebody aircraft.” Diversification should help Rolls in the long term.
Growth risk
I do have my concerns about the Rolls-Royce share price in the next couple of years. Will some investors jump ship if growth transitions as I expect? And will this cause some share price deflation? I’ve seen it with almost every recovery/growth story in nearly 30 years in this business. But I’ve no idea how high the shares might reach before — or if — it happens.
Despite the short-term stumble I fear could be coming, do I think investors with a multi-decade horizon should consider Rolls-Royce shares now? I certainly do.
