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It’s hard to take my eyes off Rolls-Royce Holdings (LSE: RR.) shares. It seems I barely need to blink, and the price goes up again. Even on top of the huge gains of the past few years, Rolls shares have added 30% so far in 2026 alone.
There has to come a time when even the most determined shareholder gets a bit twitchy and thinks about taking some cash off the table, right? Contrarians who go against the market do often come out the winners. And the valuation must surely be getting a bit hot now?
Just how expensive?
The forecast price-to-earnings (P/E) ratio has reached as high as 35. And, well… actually, that’s nowhere near as eye-watering as the rocketing share price might have us expect. And analysts see it dropping to around 27 by 2028.
That’s a bit rich compared to the FTSE 100 long-term average. But I wouldn’t put it in the ‘obvious bubble waiting to burst’ category.
In fact, it even looks cheap compare to stocks in the US, which is where the world’s biggest technology-related growth companies are listed. Over there, even Costco has a forward P/E of 45. And that’s just a discount retailer, not remotely close to the excitement of an aerospace and AI-power plant engineer.
Still, by UK standards, there’s a fair bit of future expectation built into the Rolls share price.
Let’s take a step back
Investing decisions should be based on far more than share prices. The business itself, with its future prospects, is really what it’s all about.
And I do think investors might be overlooking one key thing at Rolls-Royce. Despite other exciting advances, the Civil Aerospace division still accounts for more than 60% of the company’s underlying operating profit.
Nuclear power is only a small part of the Power Systems division — and that contributes only a relatively modest 20% or so to profit.
Rolls-Royce shares have to be vulnerable to a downturn in civil aviation — and one of those is not out of the question. It’s worth noting that management’s 2026 guidance assumes large-engine flying hours of between 115% and 120% of 2019 levels. Remember that year when we were all flying, oblivious to the pandemic that was to come?
Even brighter future?
On the positive side, Rolls-Royce has undergone a revolution in efficiency and profitability. And I reckon there’s probably still more to come on that front.
And civil aviation could continue to grow as a cash cow. Rolls doesn’t actually need big increases in engine sales. Long-term service contracts, generating recurring income from captive customers, are the key.
And while Power Systems is a smaller part of the business, it’s growing. Operating profit grew 72% in the first half, the biggest jump for any division.
What should we do?
When pondering selling some shares, I say investors should look beyond the current price and valuation. And instead, place some importance on diversification. As part of a well-diversified portfolio, I think Rolls-Royce shares are still worth considering as a Buy today rather than a potential Sell.
And there are some great candidates for providing that diversification…
Should you invest £5,000 in Rolls-Royce Plc right now?
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Alan Oscroft does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
