The Rolls-Royce (LSE:RR.) share price has been one of the FTSE 100‘s greatest recovery stories. It was trading below 100p per share less than three years ago. Today its stock changes hands at £12.82.
Strong end markets and widescale restructuring have underpinned its stunning ascent. But have Rolls-Royce shares peaked? Here are four important factors to consider before buying the FTSE company today.
1. Civil aerospace strength
A strong civil aviation sector is critical for Rolls-Royce. It accounts for almost 70% of profits, and was the backbone of the company’s post-pandemic recovery.
The good news is analysts are tipping another strong year for airlines. Latest data from trade body the International Air Transport Association (IATA) showed air passenger growth up 5.7% in November, underpinning robust expectations for 2026.
This in turn bodes well for Rolls’ aftermarket services operations and for engine orders.
2. Supply chain issues
But can aerospace companies capitalise on the airline industry’s strength as supply chain issues linger? The IATA has also said that “demand is forecast to outstrip the availability of aircraft and engines” and last until 2031 to 2034.
Rolls itself is already feeling the squeeze. November’s latest trading update mentioned “continued supply chain challenges” that in my view could threaten product delivery and push up costs.
Current disruption could worsen further as geopolitical tensions mount. Safran chief executive Olivier Andries warned of “the weaponisation of the supply chain” last week, and particularly in the case of rare earth metals used in plane engines.
3. SMR news
Yet Rolls-Royce isn’t a one-trick pony. Its aerospace expertise is also in high demand in the non-cyclical defence sector. The company is a major player in the manufacture of ship engines, battery storage technology, and diesel generators too.
I’m particularly excited by the possibility of further progress with its small modular reactor (SMR) programme following recent good news.
In September, the company was chosen as the Czech Republic’s preferred supplier for these nuclear reactors. It’s also in contention to build SMRs for the UK government. More success could help light a fire under Rolls’ share price.
4. Huge valuation
However, is the good feeling towards Rolls-Royce investment case now fully baked into its share price? There’s a good argument in my view that its shares now look massively expensive at current levels.
Today the FTSE stock’s forward price-to-earnings (P/E) ratio is 39.7 times. To put that in context, the 10-year average for its shares sits way back at 15.
My fear isn’t just that this could put a cap on further share price gains. A valuation like this can open the door to a sharp correction if the news cycle worsens and trading news remains anything other than spectacular.
The bottom line
And in my view, the chances of market conditions worsening are significant enough that they can’t be ignored. Supply chain dangers is just one major threat to the engineer. Add in other dangers like an economic downturn, product failures, competitive threats, and regulatory hurdles, and I think Rolls-Royce shares are far too risky at current prices.
I won’t be buying the FTSE 100 firm for my own portfolio. However, it may be worth considering by investors with higher risk tolerance than myself.
