Why is everyone talking about Rolls-Royce shares?
Rolls-Royce (LSE: RR) shares have been the talk of the town — or at least the City — for quite some time now. And it’s easy to see why, with the FTSE 100 engine maker serving up a mind-blowing 1,250% return in just three years.
Recently, the stock hit 1,100p for the first time. But is anyone really surprised at this point? Probably not.
Ambitious talk
CEO Tufan Erginbilgic set tongues wagging earlier this week by saying that Rolls-Royce has the potential to become the London Stock Exchange‘s largest company. Speaking to the BBC, he said small modular reactors (SMRs) could be the fuel to get it there.
SMRs are basically mini nuclear power plants built in factories, making them far cheaper to roll out than traditional plants. They could power everything from remote military bases to AI data centres.
Due to the companyâs long history supplying reactors for nuclear submarines, Erginbilgic highlighted its strong competitive advantage. “There is no private company in the world with the nuclear capability we have. If we are not market leader globally, we did something wrong,” he said.
Rolls-Royce is off to a great start, with six being built for the Czech Republic and three for the UK. More nations will surely follow, though the technology isn’t fully proven at scale yet.
FTSE 100 big dogs
As I type, Rolls-Royce is the sixth-largest firm in the FTSE 100. The biggest, AstraZeneca, is nearly twice as large based on market cap.
| Market cap | |
|---|---|
| AstraZeneca | £178bn |
| HSBC | £165bn |
| Shell | £153bn |
| Unilever | £110bn |
| British American Tobacco | £91.5bn |
| Rolls-Royce | £91bn |
Can Rolls-Royce get there? Well, SMRs won’t be operational until the mid-2030s, so it won’t happen overnight. But Rolls-Royce expects its SMR division to generate positive free cash flow (FCF) by 2030.
Before then, more SMR deals should be signed, with the company currently one of the final two contenders being considered in Sweden.
Plus the number of UK data centres is forecast to rise substantially, driven by large-scale adoption of AI. So the opportunity extends well beyond nation states.
Each SMR costs up to $3bn (£2.2bn), and while we don’t know the precise unit economics yet, it’s easy to see how large the market could become. It’s potentially above $1trn, with 400 SMRs needed by 2050, according to Erginbilgic. Rolls intends to capture the lion’s share of it.
Turbulence
In future, I expect AstraZeneca to grow, so Rolls-Royce will have to more than double in value. That’s not guaranteed, of course, and there could be cost overruns with SMRs, as well as rising competition.
There’s going to be turbulence along the road, but it’s interesting that some brokers see a credible path towards £20 per share.
UBS has a positive scenario where £5.8bn of FCF is delivered by 2028, rather than Rolls’ current ambition for £4.2bn-£4.5bn. For context, Rolls expects around £3bn in FCF this year.
Not unrealistic
AstraZeneca’s CEO is reported to be in favour of moving its listing to the US, so a rival for top spot might disappear. Meanwhile, Unilever, HSBC, British American Tobacco, and Shell are all mature dividend stocks.
In my view, it’s not pie-in-the-sky thinking to imagine Rolls becoming the UK’s largest company by 2030.
The stock isn’t cheap. But I think it’s still worth considering for long-term investors, especially on dips.
The post Why is everyone talking about Rolls-Royce shares? appeared first on The Motley Fool UK.
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More reading
- Could AI lift the Rolls-Royce share price by 93% and make the group the UK’s number 1?
- The hidden risks behind the Rolls-Royce share price rally (and why they may not matter)
- Rolls-Royce could become the largest company on the London Stock Exchange, according to CEO Tufan Erginbilgiç
- Can powering AI push Rolls-Royce shares as high as 2,046p?
- This boring FTSE 100 stock is forecast to grow twice as fast as the Rolls-Royce share price!
HSBC Holdings is an advertising partner of Motley Fool Money. Ben McPoland has positions in AstraZeneca Plc, British American Tobacco P.l.c., HSBC Holdings, and Rolls-Royce Plc. The Motley Fool UK has recommended AstraZeneca Plc, British American Tobacco P.l.c., HSBC Holdings, Rolls-Royce Plc, and Unilever. 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.
