What the Rolls-Royce share price has done in the last 3 months is absolutely stunning

The Rolls-Royce (LSE: RR) share price is easily the standout performer on the FTSE 100 over the past three years, rocketing 889% in that time.

An investor who ploughed £10,000 into the stock at the start of that run would be sitting on £98,900 today. That’s the kind of return that can transform a portfolio and an entire retirement. It also shows the potential power of backing individual stocks rather than a broad fund, although returns of this magnitude are rare.

Well that’s impressive enough, but what Rolls-Royce shares have achieved in the last three months is almost as remarkable. They’ve soared another 33%, making it the fifth best blue-chip performer in that period. The stock’s up 90% over 12 months.

The continuing rally suggests there could be more fuel left in the tank. But tread carefully.

Historic performance

On 1 May, Rolls-Royce reported a strong start to the year and reaffirmed guidance for 2025 underlying operating profit of between £2.7bn and £2.9bn.

The pandemic is a fading memory with Civil Aerospace flying hours hitting 110% of pre-2020 highs. There’s also a share buyback, with the board spending £138m of it is planned £1bn authorisation so far.

Despite all those positives, caution is necessary. No stock climbs forever. Rolls-Royce now looks expensive with a price-to-earnings ratio of 40.6 on a trailing basis, far above the FTSE 100 average of around 15 times.

Analysts expect earnings to grow rapidly though, which brings the forward 2025 P/E down to 34.5 times, then 28.8 for 2026. At that stage investors might collect a modest dividend yield of 1.1% too.

Value check

Growth remains the draw rather than income, but given high investor expectations CEO Tufan Erginbilgiç now has little margin for error.

Global trade tensions could always dent airline traffic, sapping revenue from lucrative engine-maintenance contracts priced by miles flown.

The decision about who provides prototype Small Modular Reactors (SMRs) in the UK is due around June and while approval would boost investor optimism, a delay or rejection would disappoint.

The 15 analysts serving up one-year share price forecasts have produced a median target of 820p, which is exactly where the stock stands today.

Forecasts are not certainties and this set ranges from as high as 1,150p to as low as 248p. I suspect that last one has been gathering dust for some time. However, this does confirm my sense that Rolls-Royce is set to slow. Honestly, it has to.

Long road ahead

The higher Rolls-Royce stock climbs, the thinner the air. At some point, it must hit a ceiling. Even so, investors might consider buying into its multi-year transformation. The group’s strong order book in Defence and its vital role in green energy projects could drive sustained long-term growth.

A minimum five-year horizon seems sensible, allowing time for the recovery story to play out and for the next generation of cash flows to arrive. But investors need to view its stellar past performance figures with extreme caution.

They’re more of a warning than a promise. It surely can’t keep stunning us. Mind you, I thought that three months ago.

The post What the Rolls-Royce share price has done in the last 3 months is absolutely stunning appeared first on The Motley Fool UK.

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Harvey Jones has positions in Rolls-Royce Plc. The Motley Fool UK has recommended Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.