After an enormous, quadruple-digit move higher, Rolls-Royce (LSE: RR.) shares have pulled back recently. Currently, the share price is about 10% off its highs.
I think the stock will probably climb to new highs at some point in the future, however. So, now’s the time to get ready.
Multiple growth drivers
Taking a three-to-five-year view, there’s a lot to be excited about here. For a start, Rolls-Royce has exposure to two high-growth industries alongside its main business of aerospace engines – defence and nuclear energy.
In the defence space, European countries are scrambling to modernise their hardware. This is benefitting Rolls-Royce as it makes engines for combat aircraft, transportation planes, helicopters, ships, aircraft carriers, submarines, and land systems.
Meanwhile, in the nuclear space, both countries and companies are currently exploring how small modular reactors (SMRs) can help them achieve energy security. This is likely to benefit Rolls-Royce in the years ahead as it has significant experience in this area of nuclear power.
Rapidly rising profits
Looking beyond the top-line growth, we also have a profitability story. This is predominantly what has been driving the stock in recent years but it still appears to have legs.
For example, in the company’s recent 2025 results, it advised that it’s targeting operating profit of £4.9bn to £5.2bn in the medium term as its transformation continues. Last year, operating profit was $3.5bn.
These targets suggest that operating profit could potentially grow another 50% or so in the next few years. If the company was able to achieve this, its share price could power higher.
Near-term risks
Having said all that, there’s a chance that the stock could go lower before it enjoys another move higher and hits new all-time highs. Personally, I wouldn’t be surprised to see this scenario play out.
Amid the conflict in the Middle East, it has lost a lot of its momentum recently. If this conflict doesn’t end soon, I think there’s a possibility that we could see the share price fall to near 1,000p (or maybe even lower) given the company’s high valuation today (the price-to-earnings ratio is still about 36).
This is because the conflict is having a large impact on airlines. Not only are routes being disrupted but fuel prices are much higher.
Already, we’ve seen some airlines reduce the frequency of flights to conserve fuel. If this trend continues, it’s likely to negatively impact Rolls-Royce as it generates a large chunk of its revenues today from engine servicing (which is tied to flying hours).
Be ready
So, when I say get ready for the next move higher in the Rolls-Royce share price, I’m not saying that investors should rush out and buy the stock today. It could be worth keeping the name on a watchlist and monitoring it closely in the hope of buying it at a lower price (with some cash ready to invest).
Personally, that’s what I’m doing. I’m hoping to snap it up when it’s a little bit cheaper.
