The Rolls-Royce (LSE: RR) share price is the stuff of dreams, up a staggering 1,320% in the last five years. That would have turned £10k into £142,000, showing how one successful stock can transform a portfolio.
The fact that it’s only climbed 44% in the last 12 months may actually come as a disappointment. The aircraft engine maker is still one of the top 20 best-performing FTSE 100 stocks over the last year, but only sneaks in at number 19. Clearly, any investors considering the stock must bear this in their calculations.
The Rolls-Royce recovery owed a good deal to the destruction wreaked by the pandemic as airline fleets were grounded. In October 2020 the shares hit a 17-year low of around 113p, reducing its market capitalisation below £2.5bn. The board was desperately slashing headcounts, tapping shareholders for cash and scrambling for loans.
Can this FTSE 100 stock power up?
Today, the shares trade at 1,446p and the market cap is almost £120bn. Sheer maths shows that the real fun is over.
I can still see good reasons to consider buying it. All three divisions – Civil Aerospace, Power Systems and Defence — are flying. Plus it has a big new opportunity in small modular reactors, sometimes called mini-nukes. It’s already securing commitments from the Swedish, Czech and British governments.
Rolls-Royce has another big opportunity in narrow-body (single-aisle) aircraft engines, having specialised in wide-body craft instead. CEO Tufan Erginbilgic wants UK government backing for its plan, which he reckons could create up to 40,000 well-paid British jobs. Political decisions can never be taken for granted though.
Is it simply too expensive?
The big problem is that an awful lot of good news is priced in, with a price-to-earnings ratio now almost 48. That’s down from 65 at the start of the year, but still stretched. If revenues or cash flows miss expectations, the shares could plunge back to earth.
Global travel disruptions, supply chain issues, pricier jet fuel, a slowing global economy or AI implosion could all blow Rolls off course. So what do the experts anticipate?
Of the 19 analysts giving stock ratings in the past three months, none suggests selling. In fact, most are avid fans:
- Strong Buy: 15
- Buy: 1
- Hold: 3
- Sell: 0
- Strong Sell 0
The 17 analysts offering one-year share price forecasts produce a consensus target of 1,526p. If correct, and these are only educated guesses remember, that would see the shares climb a modest 6% from here. Which isn’t exactly riveting.
Rolls-Royce is a terrific company. One to be proud of. The major risk is that investors are expecting just a little bit too much. I hold the stock and will continue to do so, hopefully for decades. I still think it’s worth considering but investors must temper their excitement. Or turn their attention to other FTSE 100 and FTSE 250 growth stocks – I can see some really exciting ones out there right now.
Should you invest £5,000 in Rolls-Royce Plc right now?
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Harvey Jones owns shares in Rolls-Royce Holdings.
This story originally appeared on Motley Fool
