Rolls-Royce (LSE: RR.) shares have surged — up 1,556% — in the last three years. An investor who put £10,000 in at the low point has seen the stake balloon to over £150,000 in double quick time. How on earth did a FTSE 100 stalwart achieve such rapid gains? And could the stock do it again?
The first element to such a rapid rise is timing. The share price didn’t sink to a 67p low by accident, it came after the mini-Budget under a certain Ms Truss. I remember it well. No one could believe a pound was the same rate as a dollar on the exchanges. It was pure panic stations.
Those of us who have been watching the markets for a while are well-acquainted with this phenomenon. When everyone is panicking? That might be the best time to buy. As billionaire investor Warren Buffett put it: “Be greedy when others are fearful.”
Factors
A second reason for the Rolls-Royce resurgence was macroeconomic. There are wider economic trends that can make a huge difference to a company. In this case, the two salient factors are defence spending and plane passengers.
The early 2020s might go down uniquely in history as a time when governments didn’t think defence spending was a priority. Major wars were a thing of the past, or so many of us hoped. The subsequent increase across the world in military spending was a boon for Rolls-Royce, which produces engines and power systems in these areas.
The number of flights and passengers took a hit because of Covid. This affected airlines and those involved in the construction and maintenance of planes like Rolls-Royce. A rebound in passengers had, of course, the opposite effect. As globalisation continues apace, this could be another factor to push the firm forward for a long time down the road.
Predicting
It’s worth bearing in mind that such macroeconomic events are very difficult to predict ahead of time. An easing of global tensions or a lessening in the numbers of flight passengers could have a negative impact on the share price.
Moving on to financial matters, these driving factors have pushed up earnings which, at the end of the day, are what growth really is. Compare 2021 revenue of £11bn with 2024 revenue of £19bn. The firm was loss-making in 2020 and 2021. Last financial year’s profits came in at £2.5bn.
Along the way, the company has outperformed expectations again and again. Exceeding the forecasts of analysts is a very good sign that a company is purring under the bonnet. That Rolls-Royce pulled off the feat over and over, sometimes by double-digit percentages, made a big contribution to the rising share price.
Only time will tell whether the run can continue, but I think this is still a stock to consider, despite its much higher price.
