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Rolls-Royce (LSE: RR) shares have soared a mind-boggling 925% in five years, but suddenly they’ve plummeting at speed. What’s going on?
Rolls-Royce was hitting near-stratospheric heights as its three divisions fire on all cylinders. Civil Aerospace has benefited from recovering air travel and miles-flown engine servicing contracts, while defence spending has grown as geopolitical tensions intensify. Its Power Systems division is also enjoying booming demand from energy-hungry data centres.
Chief executive Tufan Erginbilgiç has transformed the business, improving efficiency, margins and cash generation. He’s also developed a habit of setting ambitious targets and then beating them.
FTSE 100 growth monster
First-half 2026 underlying operating profit surged 46% to £2.5bn. Management raised its full-year forecast, now expecting underlying operating profit of £4.7bn-£4.9bn and free cash flow of £3.8bn-£4bn. Go Rolls!
The FTSE 100 stock spiked to an all-time high of around 1,586p in early August. But now they’re plunging, falling almost 6% this morning (23 October) to 1,181p, as investors fret over rising oil prices with more Iran strikes expected.
Peak to trough, they’re down 25% in less than three months. Is this the long-awaited buying opportunity? Or only the start of troubles?
At its peak, the Rolls-Royce price-to-earnings ratio nudged 50, at which point even the most bullish investors get cold feet. After the latest sell-off, it’s closer to 42. That’s still jolly expensive by ordinary standards.
There hasn’t been an obvious company-specific disaster. Instead, investors appear to be taking profits after an extraordinary run, amid concerns over rising bond yields, inflation and the global economy.
Technology stocks have also retreated as investors question whether the artificial intelligence (AI) boom can justify the money poured into it. So that could affect Rolls-Royce too, with any slowdown in AI investment possibly hitting its Power Systems division.
Rising oil and jet fuel prices may drive up flight prices and hit flying times, threatening Civil Aerospace. Defence looks better protected as geopolitical tensions continue to intensify, but FTSE 100 weapons stocks have also slipped lately, as investors bank outsize profits.
There’s also good news, as the group nears a potential £200m UK government subsidy to develop a new engine for short-haul aircraft.
Can this stock bounce back?
I’ve just checked analyst forecasts and they’re astonishingly optimistic for a company that’s already delivered so much. The median one-year price target across 19 brokers is 1,780p. If correct, that would represent a gain of just over 50% from today. That’s tempting, but many of these forecasts will have been made before the latest sell-off.
I still think Rolls-Royce is worth considering as a long-term growth holding. Any opportunity to get in at a reduced price is certainly tempting. But I wouldn’t put too much store on those upbeat forecasts. An awful lot needs to go right to justify them. Right now, there’s a lot going wrong.
But Rolls-Royce is defintely back in play. For the first time in months, I’ll consider drip feeding some money into the shares, while keeping cash in reserve in case they fall further. And here’s another FTSE 100 growth hero that’s dipped lately and worth a closer look…
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Harvey Jones owns shares in Rolls-Royce.
This story originally appeared on Motley Fool
