Is it madness to bet against the Rolls-Royce share price?
Betting against the Rolls-Royce (LSE: RR) share price probably counts as one of the worst strategies on the FTSE 100. Weâre talking about a stock thatâs rocketed 1,250% in five years and still doesnât 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 thatâs 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. Itâs 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 âburning platformâ and duly administered some shock therapy. Normally, that early impact fades. But it hasnât, 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, thatâs a risk.
There are other threats beyond the boardâs 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 wouldnât 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 donât 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.
The post Is it madness to bet against the Rolls-Royce share price? appeared first on The Motley Fool UK.
Should you invest £1,000 in Rolls-Royce Plc right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Rolls-Royce Plc made the list?
More reading
- £20,000 invested in Rolls-Royce shares ago a year ago is now worthâ¦
- Up 1,660%, is Rolls-Royce still one of the best UK stocks to buy?
- Prediction: in 12 months the surging Rolls-Royce share price and dividend could turn £10,000 intoâ¦
- Rolls-Royce shares look expensive… so what?
- Rolls-Royce stock is quietly turning into an AI play
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.
