Prediction: Rolls-Royce shares could one day be the most valuable in the FTSE 100
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Rolls-Royce (LSE:RR) shares have been some of the index’s stellar performers. And while I’m cautious in the near term, I think there’s a lot more to come in the aerospace and defense industry over the next decade.
It could go nuclear
The small modular reactors (SMRs) system is what excites me the most. And that’s because the firm’s three main divisions – civil aerospace, air propulsion systems, and defense – are already performing at the end of expectations.
Back to the SMRs. This technology can transform a company’s long-term prospects in ways the market has yet to fully appreciate.
As countries strive to achieve net-zero goals while maintaining energy security, SMRs represent a truly scalable solution. Rolls-Royce has positioned itself at the forefront of this technology, and the potential market is huge.
Of course, AI will be a big factor because data centers need a lot of power. Global data center energy consumption has reached nearly 1,000TWh. That is equal to the total electricity consumption of Japan. With a single AI query now requiring about 10 times the power of legacy search.
Rolls’ SMRs can provide a scalable system for delivering reliable and clean energy.
Other than this, I don’t see much appreciation nearby.
That’s because we’re talking about a business that already delivers exceptional returns. Operating margin stood at 20.4%, while operating margin reached 20.62%. These aren’t just good numbers – they’re pretty good, especially for an industrial company of this scale.
When I am careful
Now for my concern. At forward earnings of 37.9 times (coming in 12 months), this is not a cheap share by any means. The price-to-earnings-growth (PEG) ratio remains close to three, suggesting that investors are already pricing in significant growth ahead in the medium term at least.
That’s in line with high-end companies – you rarely find them at such a low price.
This measurement raises concerns about the risk of execution. Delivering on the promise of SMR requires navigating regulatory approvals, securing funding, and building manufacturing capacity. Most investors will be banking on Roll being the first to sell the technology. But it’s a UK-based company, and I wouldn’t be surprised if British red tape allows an American peer to take the lead.
The measurement leaves little room for error. If growth projections show optimism or margins are under pressure, the share price may face pressure.
My take
Despite the stretched valuation, I believe that Rolls-Royce could indeed be the most valuable company in the FTSE 100. That is based on generating revenues of up to £45bn over the next decade or so, with £10bn of this coming from the SMR segment.
And while I believe the stock is worth considering, I am mindful of my exposure. Personally, I’m up 350% in Rolls-Royce shares by weight, but it’s still my 12th-largest holding. I think it will stay that way for now.
