To say Rolls-Royce (LSE: RR) shares have made investors richer over the past few years would be an understatement. The stock has topped the FTSE 100 over two, three and five years, up 475%, 907% and 671%, respectively!
I don’t see Rolls-Royce generating the same returns again, especially when there’s a risk of a global recession. Along with the escalating Middle East war, this could lead to a near-term reduction in travel demand.
Meanwhile, the stock is pricey at 37 times forecast earnings. It’s arguably due a breather after sprinting uphill so fast.
However, I do think it will do well long term. Here are five reasons why I think Rolls-Royce is still worth considering.
Global travel boom
Let’s start with its bread and butter, which is engines for widebody aircraft like the Airbus A350 and Boeing 787. It’s not just about selling engines, of course, but the lucrative revenue that follows from keeping them running.
So, the most supportive trend here is rising long-haul travel. According to the International Air Transport Association, global passenger numbers are forecast to double over the next two decades, reaching 8.6 bn by 2043.
This will be driven by an exploding middle class across Asia and the Middle East. Rising international travel will obviously necessitate more planes and engines, which should underpin growth in Rolls-Royce’s key civil aerospace division.
Europe’s rearmament
Next, the firm’s defence unit should benefit from Europe’s forthcoming defence spending boom. This is going to cost hundreds of billions of euros, and will involve upgrading ageing fleets of jets, submarines, and military vehicles.
Many EU members will require modern propulsion systems for new frigates and naval vessels, along with engines for military transport aircraft and helicopters.
The European Commission aims to mobilise €800bn over four years. As things stand, UK defence firms will be able to bid for some EU defence contracts. And that will almost certainly provide opportunities for Rolls’ defence division.
AI data centres
Another big trend here is an increase in data centres, driven by the rise of artificial intelligence (AI) systems. Rolls-Royce supplies backup and mission-critical power systems for data centres.
It ended last year with over 85,000 units installed, providing over 10GW of back-up power. This gave the firm a market share of around 20%. Its battery energy storage solutions are now in over 140 projects worldwide.
As the AI revolution advances, many more data centres will be needed, providing growth opportunities for Rolls-Royce’s power systems unit.
Narrow-body market
Next, the engine maker intends to return to the single-aisle airplane market in the years ahead, preferably through a partnership.
If so, this will extend the company’s overall market opportunity, and CEO Tufan Erginbilgic is very keen on doing so.
SMRs
Finally, also looking further out, Rolls-Royce has a massive emerging market in small modular reactors (SMRs). These mini power plants can be built in factories and deployed where needed, helping countries to meet net zero commitments.
In 2024, Rolls-Royce SMR was named the preferred supplier for the Czech Republic. Recently, it won the UK competition, and is in the final two in Sweden. Poland, Romania, and the Netherlands are also interested, as well as tech giants wanting to power data centres.
According to IDTechEx, the global SMR market could reach $72.4bn by 2033 and $295bn by 2043.
