Rolls-Royce (LSE: RR) shares have made investors fortunes. Especially those who got in at the start of its post-pandemic recovery. Blockbuster performers like this inevitably raise the same question: have we left it too late? And if we buy today, could we end up nursing a quick-fire loss rather than a profit?
Let’s be honest. Anyone approaching the FTSE 100 engineering giant today has, in a sense, left it too late. At least if they’re expecting it to keep smashing the blue-chip index to pieces. This is now a £95bn company. Its shares can’t keep flying at the same dizzying speed.
Five years ago, the shares traded at just 104p. If an investor had put in £10,000 in late April 2021, they’d have picked up 9,615 shares (ignoring trading costs). Today, the Rolls-Royce share price is a stunning 1,150p. And those 9,615 shares would now be worth about £110,572. The total holding would be slightly more with dividends reinvested.
Can I still get rich from Rolls?
Sadly, £10,000 only bags 870 shares today. Which goes to show just how powerful long-term equity investing can be. So should investors still be considering Rolls-Royce at today’s price?
The first thing to say is that this remains a very good company, boasting three divisions that have all been performing strongly. Its Civil Aerospace arm builds and services Trent engines for wide-body aircraft like the Airbus A350 and Boeing 787. Defence supplies engines for military aircraft, helicopters, and naval vessels, and is the sole provider of nuclear propulsion systems for the UK Royal Navy’s submarine fleet.
Finally, Power Systems produces engines for marine, industrial, and off-highway use, such as construction, agriculture, and mining, and provides backup power for critical infrastructure such as data centres. It is also developing battery storage and hydrogen-based energy solutions.
Any one of these would make a strong standalone business. Rolls-Royce has all three, plus a significant long-term opportunity in small modular reactors, so-called mini-nukes. Of course, all three carry risks too.
Is the stock too expensive to buy?
If the conflict in Iran drives up jet fuel costs and hits flying hours, that could hit the revenues from maintaining aircraft engines, which are based on miles flown. Defence contracts offer long-term visibility, but still depend on governments continuing to fund military spending. Power Systems has major exposure to artificial intelligence data centre growth, but projects are capital intensive and politically sensitive. Mini-nukes remain dependent on winning large, multi-year contracts.
Inevitably, the shares are no longer cheap, with a price-to-earnings ratio of around 39. That’s down from above 60 not long ago, but still pretty steep. The shares are down 7% in the last week though. Some might be tempted to take advantage of that dip.
In the short term, there is a risk that Rolls-Royce fails to meet today’s sky-high investor expectations. Even a small miss could knock the share price hard. But I still think that with a long-term view, it remains worth considering. Just don’t expect another tenfold move in a hurry. Investors looking for that kind of rapid re-rating may want to look elsewhere on the FTSE 100. I can see plenty of recovery opportunities in the current volatility.
