What a few years it has been for FTSE 100 aeronautical engineer Rolls-Royce (LSE: RR)!
Over the past five years, the Rolls-Royce share price has soared 1,396%.
I would be surprised if the firm can achieve such a stunning performance in the coming five years. But what about other shares in the blue-chip index?
Starting from a large base
One of the reasons I do not expect Rolls to do as well in the coming five years as it has in the past five is that it starts from a high base.
Back in 2020, its plummeting share price meant that it dropped out of the FTSE 100. Since then, it has rejoined the index and become the fifth-largest member firm by size, with a market capitalisation of £94bn.
So, growing in value by almost 1,400% would make Rolls-Royce huge relative to other listed UK firms. That on its own does not make it impossible, but I think it demonstrates why more of the same in coming years from the Rolls-Royce share price seems unlikely.
However, the index contains far smaller firms that could grow 1,396% and still be much smaller than Rolls-Royce today.
For example, Easyjet, Mondi, Croda International, WPP, Persimmon, Berkeley Group, and Hikma Pharmaceuticals all have market capitalisations of under £4bn.
Turnaround potential
But do such companies have the business potential today that Rolls did five years back?
At that point, it was struggling with a sudden collapse in demand from civil aviation customers. It was bleeding cash and some investors were uncertain about what the future may look like for the business (though in fairness, no one is certain what the future looks like for any business: we simply make our best estimate based on the current facts).
That was a classic turnaround situation. The same may be true today for some FTSE 100 companies. WPP has seen its share price crash 57% this year, on concerns that AI could decimate demand for creative advertising work.
Other, larger, FTSE 100 firms also face question marks about falling customer demand. Diageo is down 29% so far this year, as the City frets about short-term easing of customer demand for premium spirits and the long-term trend of fewer young consumers drinking alcohol.
Still, while Rolls-Royce’s business turnaround has been strong, not all companies facing challenges come back as powerfully. Some do not come back at all, and fade into irrelevance.
Here’s my approach
I think there are some lessons to be learned from Rolls-Royce.
In 2020, it had a large addressable market, sizeable installed customer base, strong brand, and proprietary technology. But a key doubt was what the short- and medium-term demand outlook in that market would be.
In some ways, WPP strikes me as being in a similar position today. Will AI decimate the advertising market — or just be one more tool within it?
I own shares in the company and am hoping for a turnaround. But one concern I have, versus Rolls-Royce’s situation five years ago, is that I see the barriers to entry in advertising as far lower than in building aircraft engines.
In theory, the FTSE 100 could be harbouring another share (or shares) like Rolls-Royce in 2020. For now, though, I plan to keep on looking for it!
