After nearly doubling in 2024, Rolls-Royce Holdings’ (LSE: RR.) shares were surely due a less exciting 2025, right? Well, they gained another 8% with still a week of February to go.
So 8% every two months, and by the end of the year that £10,000 could be worth… No, that’s not how it works, even if it might have seemed that way last year. But with a £10k investment on the last day of 2024 now worth £10,800, what might happen by the end of this year?
Growth share dilemma
The Rolls share price is climbing ever closer to £6.50, which seemed unthinkable a couple of years ago. Something scares me about that.
I’ve seen growth shares perform a lot like this in the past, but a good few of them were bubbles waiting to burst. So buy if we think there’s further to go, and sell when it starts to look too high? That’s another thing that doesn’t work the way we might want. Bubbles don’t conveniently wait to burst until after we decide to sell.
Something else contributes to my concerns. I reckon a lot of people buying in the past 12 months have been momentum investors. They buy something because they see it going up, reasoning that they’ll be able to sell later before there’s a crash.
But then, in what might seem like a stopped-clock thing, momentum investors do often get it right. And judging by the amount of insightful analysis I’ve seen covering Rolls-Royce, many investors are surely also in it based on rational, fundamental valuation.
More than just aviation
Broker forecasts can’t tell us anything for sure. But treated with caution they can give us a feel for market sentiment. We’re looking at a forecast price-to-earnings (P/E) ratio of 32 for the year just ended, with results due on 27 February. But that doesn’t reflect the optimism over future earnings, predicted to drop the P/E to 25 by 2026. I don’t see that as too high.
Aero engine demand looks strong, though in November’s trading update CEO Tufan Erginbilgic spoke of “a supply chain environment which remains challenging.”
Last month, Rolls announced a £9bn deal for nuclear submarine reactors, its biggest ever contract with the Ministry of Defence. And the government is making noises about loosening regulations restricting the installation and use of nuclear reactors.
Rolls-Royce’s small modular reactors (SMRs) could get a boost from that, especialy with artificial intelligence (AI) server farm demand rising. A local SMR might be just the job.
Still a growth buy?
Perhaps the main risk I see is the supply side the CEO mentioned. Demand’s rising, but competition for resources is fierce. And if Rolls can’t keep pumping out the deliveries fast enough, I think those growth projections might suffer. And even a slight miss in results could trigger a sell-off.
But I do think growth investors could still do well to consider Rolls-Royce shares at today’s valuation. I’d just try not to attach too much importance to the share price chart.
This post was originally published on Motley Fool
