The Rolls-Royce (LSE: RR) share price now borders on the unbelievable. After inflicting years of misery on investors, the FTSE 100 engineering giant went stratospheric. But now every investor is asking the same question: how long can this go on?
Former CEO Warren East laid the groundwork for its recovery, but it was successor Tufan Erginbilgiç who lit the blue touch paper. He’s driven a major restructuring since 2023, cutting costs, simplifying operations and restoring investor confidence. Everything he’s tried has come off in spades.
‘Turbo Tufan’ has got lucky too, benefitting from a post-pandemic rebound in flying hours. That’s vital, because the bulk of the company’s revenues from its aircraft engines come from maintenance contracts, which are based on miles flown.
FTSE 100 growth star
Erginbilgiç has set ambitious targets and swept through them. Underlying profits, free cash flow and margins have all soared, revenue growth has beaten expectations, and the balance sheet is significantly strengthened.
For years, investors fretted about mounting debts. Now it’s not an issue at all. Dividends have been reinstated, while a £1bn share buyback programme has further boosted sentiment.
Rolls-Royce has benefitted from two of the biggest investment trends right now: Defence, with a record £9bn deal for submarine nuclear reactors, while its Power Systems division has a huge opportunity in AI data centres. There’s also potential from small modular reactors (SMRs), or mini-nukes.
The result? The Rolls-Royce share price is up a jaw-dropping 1,105% in the last three years, turning a £10,000 investment into £120,500.
Just when investors reckon the Rolls-Royce share price can’t go any higher, it does. Many investors who held off after missing the early days of the recovery will be kicking themselves, as the shares have just powered on. The stock is up 115% over the last year and almost 10% in the last month.
That’s pushed the price-to-earnings ratio beyond 62, making the stock dauntingly expensive today. There’s an awful lot of growth priced into that number.
Share buybacks and free cash
Yet Deutsche Bank still rates Rolls-Royce a Buy, recently raising its share price target from 1,220p to 1,325p, an 8.6% increase. Today, the shares trade at 1,241p. Deutsche warned of “persistent supply chain constraints impacting aerospace” but highlighted Power Systems as “experiencing strong growth driven by data centres and defence contracts, with potential for significant upside”.
Like me, it’s cautious on SMRs. They offer a brilliant opportunity across several countries, but projects must wait for government approvals and funding, which could prove slow and tricky. Especially in the UK. US tariffs are a more immediate worry. Today, Rolls-Royce shares are down 2% as investors absorb uncertainty over Greenland.
Full-year results land on 26 February. Guidance has set a target operating profit of £3.1bn to £3.2bn, and £3bn to £3.1bn of free cash flow. Even a mild disappointment could be punished.
But with cash flowing, dividends reinstated and further buybacks likely, I still think this growth monster is worth considering. However, investors must take a long-term view, because there’s no way it’s going to repeat recent stellar short-term performance. Rolls-Royce has soared but the air is getting mighty thin up here.
