Rolls-Royce (LSE:RR.) remains one of the FTSE 100‘s most exciting shares. They hit a new peak of £13.68 per share last week, and though they’ve dropped back from this level, remain 65% higher than they were a year ago.
The question is, can the engineering giant continue marching higher? City analysts are pretty confident they can. They expect Rolls-Royce’s share price to rise 11% from £12.76 today to £14.12 in 12 months. That’s based on the average price forecast of 16 analysts.
They’re also expecting the company to pay a dividend of 11.04p per share. If these forecasts are correct, a £20,000 investment today would be worth £22,303 a year from now.
Yet I’ve a growing sense of doubt about these forecasts.
Military conflict raises risks
Rolls-Royce has been one of the worst-performing FTSE shares this week. Perhaps it isn’t so surprising, given the impact that military action in the Middle East is having on the airline industry.
The engineer relies on a robust civil aviation sector to drive earnings. Last year, it made 62% of total underlying operating profit from activities like selling plane engines and maintaining aircraft. The problem is flight cancellations due to the US-Israel-Iran conflict are leaving planes parked up, reducing flying hours and thus servicing revenues under ‘power by the hour’ contracts.
What’s more, rising fuel costs are hitting airlines’ profits, and could continue rising if shipping route closures hit oil supply. Lower industry earnings could translate into weaker demand for Rolls’ power units if carriers delay new aircraft orders.
Finally, shipping disruptions could deepen the supply chain headaches already plaguing aerospace firms. In this scenario, costs could rocket and project delays emerge.
On the plus side, Rolls’ defence division could benefit if a prolonged conflict gives US arms spending an added boost. But would this offset those other pressures we’ve discussed? I think not.
High valuation
The problem is that, even after their recent fall, Rolls-Royce shares still look enormously expensive. The price-to-earnings (P/E) ratio remains at 38.4 times, far above the long-term average of 15-16. For investors looking for shares to sell, it could therefore remain a prime candidate to offload.
Rolls has proved its credentials as a top growth share that’s worthy of a premium rating. Last year, earnings per share (EPS) leapt 46% year on year. Analysts are predicting further strong growth of 19% in 2026. But this creates added risk — even the slightest whiff of this target being missed could send Rolls-Royce’s share price into freefall.
It’s not just the Middle East war that could make this reality. A sharp economic slowdown that hits its end markets, existing supply chain issues, and contract losses due to the competitive landscape could push the FTSE company sharply lower.
Are Rolls’ shares a potential buy?
There’s a lot to like about Rolls-Royce today. And with its long-running restructuring programme tipped to deliver more juicy rewards, it could be a great stock for more risk-tolerant investors to consider. But I won’t be buying it for my portfolio at current prices.
