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Betting against the Rolls-Royce (LSE: RR) share price probably counts as one of the worst strategies on the FTSE 100. We’re talking about a stock that’s rocketed 1,250% in five years and still doesn’t seem to know how to stop.
Investors who banked profits a year ago will be kicking themselves today, with the shares more than doubling in the past 12 months alone. But that’s history. As ever, what matters is what happens next. Can it really keep climbing like this?
Rolls-Royce should have run out of steam months ago. The so-called ‘new manager bounce’ triggered by the appointment of Tufan Erginbilgic began more than three years ago on 1 January 2023. It’s remarkable that he’s still having such an impact.
FTSE 100 growth hero
Erginbilgic famously kicked off his tenure by decrying Rolls-Royce as a “burning platform” and duly administered some shock therapy. Normally, that early impact fades. But it hasn’t, largely because he keeps setting ambitious targets and then beating them with ease.
In full-year 2024, Rolls-Royce reported a 57% jump in underlying operating profit to £2.46bn, while free cash flow surged 88% to £2.43bn. Investors shared in the success, with a £1bn share buyback.
Full-year 2025 results are due on 26 February and guidance remains upbeat. The company is targeting underlying operating profit of £3.1bn to £3.2bn, with free cash flow between £3bn and £3.1bn.
That is, technically, a slowdown. Even at the top end, profit growth would be ‘only’ 26% and cash flow growth 28%. I doubt investors will complain, but there will be plenty of noise if Rolls-Royce undershoots.
Could that happen? Possibly. But Erginbilgic strikes me as too smart an operator for that. I suspect he’s built in a nice margin of safety. Expectations are sky-high but if Rolls-Royce beats them again, the shares could fly higher still.
Sky-high price-to-earnings ratio
Valuation is the other big worry. The trailing price-to-earnings ratio is now an eye-popping 60. But that may be misleading. The forward P/E for 2025 falls to 20.5, which is hardly demanding. Oddly, it then rises to around 37.5 for 2026. Normally, the further out the P/E goes, the lower the multiple. That raises an awkward question: do markets expect the share price to grow faster than earnings? If so, that’s a risk.
There are other threats beyond the board’s control. A recession, or anything else that hits flying hours, would hurt as its aircraft engine maintenance revenues depend on miles flown. The group’s Power Systems division has a huge opportunity in AI data centres, but if the AI bubble bursts, it could take a hit.
Its Defence arm could slow if geopolitical tensions ease as we all hope they will. And while its small modular reactors — or ‘mini-nukes’ — are a huge long-term opportunity, they may take years to materialise if governments drag their feet. A broader market sell-off wouldn’t help either, and volatility is running high. If I didn’t hold Rolls-Royce, I don’t think I’d consider buying it at today’s highs.
So no, I don’t think investors would be completely mad to bet against the Rolls-Royce share price. Momentum is slowing, with the shares up just 6% over the past three months. But they would still have to be very confident.
