Image source: Rolls-Royce plc
The Rolls-Royce Holdings (LSE: RR.) share price has painted one of the brightest pictures in the UK investment landscape. It’s up 90% in the past 12 months and more than 900% over five years.
It dipped a bit recently though, down 13% since September’s 52-week high. But the shares are really only back where they were in August.
If we might be in for a cooling-off period, I can think of three key dangers.
Cyclical aviation demand
A civil aviation crash triggered the Rolls-Royce share price collapse in the wake of the pandemic. The proud British aerospace firm even faced threat of collapse, under the weight of mounting debt.
The other side has been a very strong recovery in the past few years. And more than actual engine sales, the years of service and maintenance Rolls-Royce provides really brings in the cash.
But I can’t help wondering if demand might have reached a peak. Coupled with the cost of developing new engines, I fear markets might have built still more into the share price than we’ll actually see.
Military aviation demand has also helped push the Rolls share price. But demand growth there will surely also slow to a steady level some day. And maybe even decline from a peak.
Global threats
I can also see Rolls-Royce possibly facing various international challenges in the next decade. It’s heavily reliant on global trade for the parts and materials it buys. And right now, there are all kinds of threats, from rising prices to trade wars and export controls.
Civil aviation in particular faces regulatory risk too. Tackling the effects of climate change has gone out of fashion a bit. But the need to address it will surely come back to bite. And I can see a future of pressure on aero engine emissions and rising costs of research into cleaner power.
Rolls-Royce is developing hydrogen engines. But they’re still some way from commercial production.
Nuclear power
Rolls’ development of small modular reactors (SMRs) is surely one of the highlights of its future. The UK Government has recently given the green light for the country’s first SMR power station. To be built at Wylfa on Anglesey, it could eventually house up to eight reactors.
But here’s my fear. Too much of the future profits might already be built into the Rolls-Royce share price.
There’s going to be a lot more development cash needed before Rolls sees the SMR division turn profitable. In fact, at interim time in July, CEO Tufan Erginbilgiç said he doesn’t expect to see profit and positive cash flow until 2030.
And if we really do see an AI bubble burst, well… powering data centres is where many investors see those SMRs in big demand.
Time to bail?
I’m not predicting a Rolls-Royce share price collapse. No, I just think we need to be mindful of the risks rather than only seeing the profit possibilities.
We might well see more share price weakness. But I still rate Rolls-Royce as one for long-term growth investors to consider. And if I can buy some a bit cheaper in the coming months…
This story originally appeared on Motley Fool
