One of the most stunning turnarounds among blue-chip UK shares in the past decade is what we have seen at Rolls-Royce (LSE: RR). The Rolls-Royce share price today stands 858% above five years ago.
It had already been flying for several years by the start of 2025. But that momentum has continued, with the share price up by three quarters so far this year.
Over a few weeks since the end of October though, the Rolls-Royce share price has tumbled 12%.
Could that just be a blip? Or might it signal that the glory days have ended?
Strong business performance
If Rolls-Royce shares had soared while the business’s fortunes had moved sideways or even down, I’d say a rise of anything like 858% in the share price would not make sense. But the reality is that Rolls today is in a dramatically different and better place than it was five years ago.
Partly that is due to a changing environment. Demand for civil aviation has rebounded in the wake of the pandemic, defence spending has soared since Russia launched its war in Ukraine and demand for power generation equipment is robust.
But Rolls deserves a lot of credit too. It has slashed debt, reinstated its dividend, cut a lot of costs out of the business and has been delivering on its targets with a reliability few would have expected five years ago.
Valuation doesn’t look unjustifiable
So while the share price has grown, earnings have also been transformed. Currently, the Rolls-Royce share price-to-earnings ratio’s 15. That doesn’t look unreasonable to me.
I do not see it as a screaming bargain, but I also do not think it is unjustifiably high. After all, Rolls has a storied brand and large customer base in an industry that benefits from high barriers to entry and high prices.
Is investor sentiment cooling?
Still, the past few weeks have seen a notable decline in the Rolls-Royce share price.
Could that signal a turnaround in fortunes? A trading update earlier this month may hold a clue.
The company maintained its full-year financial forecast, which is positive. But the update did contain one point that may give investors pause. It mentioned “continued supply chain challenges”. If those continue, they could hurt production schedules and eat into profits.
Apart from that though, the statement was resolutely upbeat.
Supply chain challenges for Rolls and many other companies have been widespread knowledge this year. So can that alone explain the share price fall lately?
I’m on the sidelines
I do not think so. Rolls seems to be doing well. As far as the update suggested, the business seems to be firmly on track.
An alternative explanation for the recent fall in the Rolls-Royce share price is simply that, after years of strong momentum, investors are losing some enthusiasm for the growth story.
If that is the case, the price could continue drifting down even in the absence of any material news.
For now, I have no plans to buy the share.
