Up 1,257%, is it too late to consider Rolls-Royce shares?

The past few years have been simply phenomenal for shareholders in Rolls-Royce (LSE: RR). Over the past five years, Rolls-Royce shares have surged by 1,257%.

For a long-established industrial company, that is a simply spectacular performance.

But does it mean there is no value left for newcomers at today’s share price?

Or might it be that Rolls-Royce shares – already up 27% so far this year – potentially have more to give?

The good news just keeps on coming

The surge in the share price reflects two things.

One is a low base.

The pandemic brought the company to its knees. Civil aviation is Rolls’ largest business so if airlines are not ordering new planes or servicing existing ones as much, there is immediate pain for the business.

The second factor in the surge has been a transformation not only in Rolls’ financial performance but also its confidence as a business.  

That helps explain the rising share price. However, it also means that a lot of ongoing investor optimism is now factored into the share price given the company’s strong performance. The shares now sell for 51 times earnings.

Last week saw further grounds for optimism about the business performance, with Rolls-Royce raising its guidance for the full year to £4.7bn–£4.9bn of underlying operating profit and £3.8bn–£4.0bn in free cash flow.

Is this worth considering now?

Warren Buffett, the famed investor, has often said that he looks for great companies selling at attractive prices.

The strong business performance of late underlines that Rolls has at least some attributes of being a great company.

It operates in industries where barriers to entry are big and demand is currently high. It has a large installed base of jet engines, deep knowledge and prestigious brand.

But it is also susceptible to external demand shocks over which it has little if any control, as the pandemic illustrated. That is a risk that concerns me, as we know from history that civil aviation tends to enter sudden unforeseen passenger demand troughs from time to time.

At the right price, that risk would be manageable for me as an investor.  That brings me to the second part of Buffett’s aphorism: are Rolls-Royce shares attractively valued?

This looks expensive to me

I do not think so. That means I do not see them as shares for investors to consider at the current level.

That does not mean they might not go up further from here. Business performance is strong and investor enthusiasm remains high.

But the valuation leaves no room for error, in my view.

Rolls-Royce has to keep delivering perfectly to maintain its share price premium – and even then, it still looks unjustifiable to me. A mature British industrial company selling for over 50 times earnings simply is not an attractive valuation as far as I am concerned.

Fortunately, there are other more keenly priced growth stories in the London market right now. I am focusing on deciding whether they may merit a place in my portfolio.

Should you invest £5,000 in Rolls-Royce Plc right now?

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Christopher Ruane does not hold any positions in the companies mentioned.