It sounds like the stuff of investor dreams: a beaten down industrial company with a share price in pennies that, within a few years, hits £13. But that is what has happened at Rolls-Royce (LSE: RR). Rolls-Royce shares sold for pennies a little over three years ago. Lately they passed the £13 mark. Currently they are hovering beneath it.
Rolls has put in three years in a row of brilliant stock market performance.
Sometimes a share can do well for a while then runs out of momentum. Rolls seems to be – fittingly enough – on a roll. It has already hit a new all-time high this month.
So, can the share price keep rising – and ought I to add the company to my ISA?
Strong performance, strong market
What lies behind the great performance of the past few years?
Like its competitors, Rolls has benefitted from strong demand in its areas of activity.
Civil aviation bounced back strongly after years in the doldrums due to the pandemic. Defence spending has surged in recent years and could keep growing at pace in coming years. The power business is also seeing robust customer demand.
Against that background, Rolls has been able to shine thanks to its own strong performance. It has cut a lot of costs from the business, set out ambitious financial goals and looks much more disciplined than it had for many years.
The market has noticed that success and is banking on management to keep setting and achieving ambitious goals, as it has been doing in recent years. That has helped push Rolls-Royce shares higher and higher.
Where might things go from here?
Could that continue? I think it could.
Current company management has consistently displayed its competence. The wind is in the company’s sails when it comes to demand.
At 19 times earnings, the share does not look cheap to me.
But I also do not think it is necessarily overvalued. If the business can keep growing earnings in years to come – and I think there is a fair chance it may – the prospective valuation may actually be quite attractive.
As long as the business keeps delivering strong results, I see the potential for Rolls-Royce shares to move higher over the next several years.
Time to buy?
Despite that, I have no plans to buy the share for my portfolio.
There are risks to the future performance of the company that I do not think the current share price reflects.
A key one, to my mind, is any sudden unexpected slowdown in civil aviation demand, like we saw during the pandemic and have also seen in the past after terrorist attacks.
Such a slowdown could happen suddenly at any moment and lies outside Rolls’ control. At the current share price, that sits uneasily with me as an investor.
