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Rolls-Royce (LSE: RR) shares have won a lot of admirers of late. The share price multiplying 20 times since Liz Truss was in office helps, of course. Investors are clearly impressed with the turnaround enacted by CEO Tufan Erginbilgiç.
The growth in global flying hours has made the firm’s plane engines something of a hot property. I myself am very bullish on the opportunity presented by SMRs too (small modular reactors). These are a kind of mini nuclear reactor with the technology the firm’s engineers have been perfecting since the 1950s.
But the jewel in the Rolls-Royce crown, and the reasons the shares could still be a steal of a buy today, might be none of those things. Let me explain.
Success Story
In April, Rolls-Royce’s Bristol site was confirmed as the sole supplier for the long-term maintenance and repair of EJ200 engines used in the RAF’s Typhoons.
These aircraft, also named Eurofighters or Eurofighter Typhoons, are some of the world’s most impressive fighter jets. They’re ‘swing-role’ planes. This means they can dogfight and also perform air-to-surface operations. In short, this is world-class engineering. And Rolls-Royce, on whose engines the EJ200 is based, sit at the beating heart of it.
With 600 planes in operation, 1,400 engines sold in total and over 1.5m flying hours already registered, I think it’s fair to say that they’ve been a success. Oh, and what about those across-the-board 10% Donald Trump tariffs? The US gave Rolls-Royce engines an exemption. European countries are targeting 3%, 4% or 5% of GDP defence spending in the coming years. I expect that to be a long-term catalyst for Rolls-Royce shares.
On all cylinders
The other side of the coin is that increased global conflict is now baked into the share price to some degree. The FTSE 100’s sixth biggest firm has a forward price-to-earnings ratio in the 40s. That’s one of the highest Footsie valuations. The shares might have a long way to fall if, as I’m sure we’re all hoping, tensions lower across the world.
A cessation tofo hostilities might mean the firm’s defence revenues (currently around 15% of total) might be at risk of falling. This is very much the nature of defence stocks. And I think many investors might be put off from buying stock in a firm that deals in products of this nature.
On balance though, Rolls-Royce is a stock firing on all cylinders. With multiple income streams from various sectors, high barriers to entry in almost everything it sells, I don’t think it’s an accident that this is one the UK’s hottest properties these days. I own the shares myself for what could be a very bright future. I think Rolls-Royce is one to consider.
This story originally appeared on Motley Fool
