Given the hugely impressive post-pandemic rally of Rolls-Royce Holdings (LSE:RR.) shares, it’s easy for someone to think they’ve missed out.
But as a reminder that you don’t have to be an early-stage investor to be a winner, Warren Buffett’s Berkshire Hathaway didn’t invest in Apple until after iPhone 6 was launched. Since then, it’s estimated that the investment vehicle has realised gains of over $160bn from the stock.
With this in mind, could recent wobbles in the Rolls-Royce share price be an ideal opportunity for those who’ve missed out previously (and others) to consider the stock?
What’s going on?
Understandably, investors have concerns that Rolls-Royce could be affected by events in the Middle East, particularly if the current stand-off continues.
With soaring jet fuel prices and flight cancellations, the group’s civil aerospace division could see a material drop in the number of hours that its engines are flown, which is the basis on which it generates the majority of its revenue.
Positively, a trading update on Thursday (30 April) reported: “We expect to fully mitigate the current financial impact of the disruption to our business.”
Personally, I’m not too concerned at this stage. I’m sure the war will end soon (something we all hope for). And the group’s post-pandemic recovery is a reminder of how resilient the aviation industry can be.
Indeed, it’s the long term that really counts when it comes to investing. That’s why the recent fall in the group’s share price could be an opportunity. Remember, not so long ago — March, in fact — its shares were changing hands for 17% more than they are today (4 May).
Why?
Personally, I think there’s huge potential for the group from its small modular reactor (SMR) programme. These factory-built mini nuclear power stations have a number of competitive advantages:
- Low cost – many large-scale plants run hugely over-budget.
- Deliverable – built using proven and commercially available technology.
- Global – the technology can be deployed anywhere in the world.
- Scalable – standardised off-the-shelf components.
The key is modularisation, which involves doing as much as possible inside a factory. Not only does this help maintain quality but it also reduces the opportunity for on-site disruption.
And with the growth in data centres putting a strain on existing energy infrastructure, SMRs could prove to be highly lucrative. Indeed, the group’s boss thinks it could help make Rolls-Royce the UK’s most valuable company.
Rolls-Royce SMR is the only company with multiple contractual commitments to deliver SMR units in Europe and is well placed to become a market leader globally
Tufan Erginbilgic
Of course, there are no guarantees that the technology will work. And its commercial viability is unproven. There’s also a risk that investors have already priced in some of the potential gains. And even if everything goes to plan, it’s unlikely that any significant revenue will be generated from SMRs until 2030 at the earliest. That’s why I believe it’s important to take a long-term view.
Personally, I think the SMR programme adds another string to the group’s bow. Importantly, it reduces its reliance on the aviation and defence sectors, which helps spread risk.
The group’s already signed agreements in Estonia, Türkiye, and the Czech Republic. And it’s working with Great British Energy to design and deliver the UK’s first reactors.
