Image source: Rolls-Royce plc
Rolls-Royce Holdings’ (LSE:RR.) share price has been a bit flat of late. However, I don’t think this should detract from the fact that just before Father Christmas arrived in December 2020, the aerospace and defence group’s shares were changing hands for £1.16. As we enter the festive season five years’ later, they are now trading at £11.02. That’s an astonishing increase of 850%.
It means a £10,000 investment then would now be worth an incredible £95,000. And this excludes the two dividends that have been paid over this period. Include these and the gain would be £905 more. But could there be more to come?
Aiming to be top dog
In August, the group’s boss, Tufan Erginbilgic, told the BBC that artificial intelligence (AI) has the potential to make Rolls-Royce the UK’s most valuable company. For this to happen today — and topple AstraZeneca from pole position — it would have to increase its market-cap by around £117bn.
Analysts are forecasting a post-tax profit of £3.44bn – or 42.6p a share – in 2028. This means the group’s shares trade on 25.9 times forecast earnings. On this basis, it would need to increase its profit by around £4.5bn to have the UK’s largest stock market valuation. Of course, this assumes the market-caps of other companies remain unchanged.
Such a large increase in profit’s a tall order. But Erginbilgic reckons AI could be the catalyst. He believes the group’s small modular reactors (SMRs) could be the key to meeting the anticipated huge additional demand for electricity resulting from the planned increase in data centre capacity. He says the group will have done “something wrong” if it doesn’t become the global SMR leader.
The group’s boss estimates there will be a need for 400 SMRs by 2050, with each one selling for over £2bn. Once installed, there will also be revenue generated from long-term maintenance contracts.
However, there’s a long way to go yet. There are no SMRs in the world that are currently commercially viable and the group’s not anticipating any significant revenue until the 2030s. Also, there are numerous designs encompassing different types of technology. Only time will tell whether the version being developed by Rolls-Royce will become one of the market leaders.
Who cares?
But it doesn’t really matter whether Rolls-Royce becomes Britain’s most valuable company. As long as its revenue and earnings continue to go in the right direction, I’m sure its share price will follow.
And despite the post-Covid share price rally, I still think the group’s shares are worth considering. That’s because it doesn’t have all of its eggs in the SMR basket. The group’s most recent results show that its civil aviation and defence divisions are doing well.
However, there are some risks. A downturn in the global economy is likely to affect air traffic. Also, with the group’s shares trading on a relatively high multiple, there could be a sharp correction if there’s an earnings miss.
But Rolls-Royce looks to be in good shape to me. It has an excellent reputation and each of its three divisions are exposed to growing markets.
It’s repeatedly proven the critics wrong over the past few years with a number of earnings upgrades and I wouldn’t be surprised if this continues as we head towards the next decade.
