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Like any stock, the Rolls-Royce (LSE: RR) price can go down and up. I thought the old truth should be told, as it has recently gone in one direction – like a rocket bound for the stratosphere. Can it last?
Shares in Rolls-Royce have risen 1,200% in the past five years, turning £10,000 into a staggering £130,000 and potentially changing people’s retirement single-handedly. I was expecting its momentum to flag right now, but it has increased 110% in the last 12 months. It managed to increase by 7% last month.
But is this as good as it gets? The stock is trading at a high of 61, streets ahead of the FTSE 100 the average is about 18. That’s a pretty bad increase in futures prices and, if earnings disappoint, shares could retreat as bank gains investors and short-term bandwagon jumpers cut and run.
The FTSE 100 is a growing animal
I don’t know if that will happen, but any investor who owns this stock, or is considering buying it, must accept that risk.
In The Motley Foolwe encourage long-term investing. As a rule, we intend to hold shares for years. We think that second-guessing temporary movements are almost impossible. Try to be smart, and the market will punish you. Real investment returns are measured in decades, not weeks. This gives companies time to grow, and allows reinvested profits to be compounded. Buying and holding also saves on trading costs. They combine.
So my natural bias is to grab a Rolls-Royce no matter what the news flow brings. Although I believe that sharing has to slow down from here, and it may crash.
Like all stocks, there are risks. Rolls-Royce relies on a complex global supply chain for aerospace engines and components. Delays, shortages of key components, or problems with key suppliers can hurt production and revenue. Technical or operational failure is dangerous, as we saw with its problematic Trent 1000 engines. Any decline in passenger traffic could affect sales revenue and engine maintenance.
Risks and rewards
Its Power Systems arm is benefiting from the rush to build artificial intelligence (AI) data centers, but if AI bubbles it, that could be over. Peace in Ukraine, in the event of an unexpected (so far) development, may reach a defensive arm, while a large opportunity for small reactors or nuclear projects may not be seen. All of these could beat a Rolls-Royce.
The biggest short-term risk comes on February 26, when Rolls-Royce delivers full-year 2025 results. It expects underlying operating profit of between £3.1bn and £3.2bn, and free cash flow of between £3bn and £3.1bn. Any deficiency can be severely punished. On the other hand, if the company exceeds the target, and given the stellar record of CEO Tufan Erginbilgiç certainly can, the stock can rise another leg higher.
Although the trailing P/E looks extreme, the forward P/E is 20.7, which is very difficult. Is it worth considering today? From a short term perspective, I would say no. A quick profit is made. But in the long run, I would say yes. This is a smart company with a lot to offer. I own a Rolls-Royce and have no plans to sell it. But it can still crash.
