Image source: Getty Images
Rolls-Royce (LSE:RR) shares have totally blown apart the notion/myth that FTSE 100 blue-chips can’t produce spectacular returns. They’re up by an astonishing 2,000% in just four years!
Alas, I lacked the foresight to invest at the lows. But I did get onboard the Rolls-Royce jet after it had departed the airport back in mid-2023. So I can’t grumble, as this has been a great investment for me.
But do I think investors looking at it with fresh eyes should consider it today?
Larger than I anticipated
The first thing I would ask is: does Rolls-Royce operate in markets that are set for expansion over years and ideally decades?
Back in March 2023, when I was weighing up whether to buy the FTSE 100 stock, I wrote: “One of the things I value in a business is optionality…This gives it multiple ways to grow and, I believe, a greater chance of succeeding over the long term. For me, Rolls-Royce has abundant optionality“.
Specifically, two of Rolls-Royce’s divisions — Civil Aerospace and Defence — looked primed for long-term growth, driven by rising global travel (particularly among the middle classes in Asia) and higher military spending by NATO members (necessitated by Russia’s invasion of Europe).
I underestimated the opportunity for the Power Systems unit to benefit from the proliferation of data centres. But I did think that the potential of Rolls-Royce’s small modular reactor (SMR) business was underappreciated. To achieve net zero targets and secure energy supply, I assumed European governments would invest in SMRs, and Rolls-Royce was an early global leader.
Fast-forward to today, the long-term growth opportunity is larger than I first imagined. The AI revolution has since gone into overdrive, creating demand for Rolls-Royce’s power systems, particularly for prime power (which is far more profitable).
Additionally, the firm has since signalled its intention to re-enter the narrow-body (single-aisle) market. This is another significant growth opportunity, with Airbus anticipating global demand for 33,920 new single-aisle aircraft over the next 20 years.
By 2045, air traffic will more than double and reach about 10 billion passengers per year.
Airbus.
Finally, in the past 18 months, Rolls-Royce SMR has signed contracts with the UK, Czech Republic and Sweden. However, the SMR opportunity now extends to tech giants looking to power their data centres and bypass grid connection delays.
Dip-buying
Another thing that has changed dramatically is the balance sheet. Three years ago, Rolls-Royce had net debt of £3.3bn whereas in June it had a net cash position of £2.1bn. So this doesn’t worry me anymore.
What does worry me though is valuation. Today, the stock trades at 41 times earnings, and 30.5 times on a forward-looking basis. If the engine maker’s growth disappoints the market moving forward, the multiple could compress.
For those who don’t own the stock today, I don’t think ‘piling in’ near an all-time high is a wise move (I wouldn’t were I in that position). Instead, I’d consider opening a starter position, with an eye to building it out on dips over time. This is what I did myself between mid-2023 and early 2025.
Buying gradually on dips can be a smart strategy because it reduces the risk of getting the timing wrong, while allowing you to accumulate more shares at lower prices.
Should you invest £5,000 in Rolls-Royce Plc right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Rolls-Royce Plc made the list?
Ben McPoland owns shares in Rolls-Royce.
This story originally appeared on Motley Fool
