Is the Rolls-Royce share price getting silly now?

We’re a week away from Rolls-Royce Holdings‘ (LSE: RR.) first-half results. And the share price recently broke through the £10 level. It’s back a bit from that, as I write, but it’s still done far better than I ever imagined.

The soaring bull run has to come to an end, of that I’m convinced. They always do, because valuations can’t keep rising forever. I just don’t know when it might happen.

What could we expect from H1 results due on 31 July? And what might forecasts out to 2027 mean for Rolls-Royce shares?

Magnificent 7 heights

Is the Rolls-Royce share price rise based on rational long-term profit potential? Or are investors piling in recklessly with a rose-tinted view and hoping to see the stock replicate what Nvidia‘s done?

Oh, hang on, it’s actually not that far behind. The world’s leading artificial intelligence (AI) chip developer has soared 1,500% in the past five years — Rolls-Royce is up 900%.

In its 1 May trading update, the Rolls’ board said its “2025 guidance of £2.7bn-£2.9bn of underlying operating profit and £2.7bn-£2.9bn of free cash flow remains unchanged“.

Back on track

Large engine flying hours reached 110% of 2019 levels in the first quarter of this year. Never mind recovering from the Covid hit — Rolls has achieved that and then some. We need to remember however, that the company had been on a bit of a downturn prior to the pandemic and was struggling a bit.

Still, it’s a very positive sign that Rolls appears to be back to long-term growth. But it might be at a steep price for investors who want to get in today. Rolls’ shares now cost more than twice their all-time pre-pandemic peak.

At least the company’s 2025 outlook lends support to bullish broker forecasts. City analysts expect earnings per share to rise 9% between 2024 and 2027. If they’re right, the current forward price-to-earnings (P/E) ratio of 42 could drop to 31.

Rich valuation

But is that too high? I’m really not sure how much growth potential there is beyond the next few years. I mean, you can only fit two engines on each Boeing 787 or Airbus A350. There might be a lot of growth hope pinned on Rolls-Royce’s other divisions, including its small nuclear reactors — which do admittedly look impressive.

Sustainable long-term growth might really be there, and maybe I’m focusing too much on today’s proven business. And if forecasts for net cash rising to £6.9bn by 2027 are valid, we could drop the effective P/E for the enterprise itself to 28 by then. That might not be too stretching at all. My fears might be misplaced, and the Rolls-Royce share price might have some way further to go.

But I’m minded of thoughts I’ve been increasingly hearing as US markets head into tech stock earnings season: merely good results might not be good enough.

Growth investors might still do well to consider buying now, even after those huge share price gains. But I don’t need the risk, so I’ll stick to just watching.

The post Is the Rolls-Royce share price getting silly now? appeared first on The Motley Fool UK.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Nvidia and 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.