Is the Rolls-Royce share price running on empty?

How does the Rolls-Royce (LSE: RR) share price do it? The FTSE 100 engine maker has rocketed an astonishing 1,190% over five years and 115% in the past 12 months.

After such a blistering run, I thought it must surely slow, but no. The FTSE 100 grew just 0.55% in August. A lot of the stocks in my Self-Invested Personal Pension slipped, but Rolls-Royce climbed another 8%. The air feels thin up here, so whatâs still pushing it higher?

Strong trading momentum

The board didn’t issue any new updates last month. However, it still enjoyed momentum from a strong set of first-half results issued on 31 July. Underlying revenues rose 13% to Â£9.06bn, while operating profit jumped 50% to Â£1.73bn. Margins widened, free cash flow improved and management lifted full-year guidance.

A note by Citi in August gave it a further lift. The bank hiked its price target to 1,101p from 641p, citing higher earnings forecasts and stronger cash flow assumptions. It forecasts profits to grow at a compound annual rate of 12.3% between 2025 and 2030, and is warming to Rolls-Royceâs small modular nuclear reactors.

Mini-nuclear plants could open up a lucrative new long-term revenue stream, but this is a long way from guaranteed. Projects face planning and approval delays and it could take years for the returns to flow.

Valuation looks demanding

That’s not the only risk facing CEO Tufan Erginbilgic, who recently flagged up supply chain and tariff threats. Many investors will look at the price-to-earnings (P/E) ratio of 52 and wonder how far Rolls-Royce shares can travel from here. Others will say that sky-high multiple signals confidence in future earnings growth.

It’s also worth noting that the forecast P/E for 2025 falls quite sharply to 43.2, as earnings continue rising, and slides again to 33.8 in 2026. Those numbers look a little less demanding.

Analysts remain upbeat. Consensus suggests the shares could climb from 1,107p today to 1,226p over the next 12 months. That’s a 14.5% increase. This is far more modest than recent gains, but still solid.

That price target based on 13 analyst forecasts. Some of those will be out of date, by months or even a year or two, and will be based on a much lower starting figure. As ever, we should treat forecasts with caution.

A stock to buy on a dip?

I’m worried that Rolls-Royce shares are now climbing out of sheer habit. Investors may be piling in expecting more of the same, or trying to join in the fun before it’s too late. If sentiment changes, they could retreat at speed.

I think long-term investors might still consider buying today, but only if they hold a minimum five-year view and accept the risks of short-term turbulence.

The Rolls-Royce growth story has now moved past the recovery stage. The higher the climb, the greater the challenge. I hold the stock and won’t sell. I won’t dive in at today’s price though. Unless we get a wider stock market dip to bring that P/E down.

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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.