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The Rolls-Royce (LSE: RR) share price has been at it again. Yesterday (19 September), it vaulted 5.75% to 525p and a new record high. This means the FTSE 100 stock is up almost 650% in just 23 months!
What caused this latest rise?
What happened
It’s sometimes difficult to know for sure why a stock moved on a particular day. Often there isn’t any reason and we misinterpret randomness. But a 5% move from a large-cap stock is normally news-specific.
Yesterday, Rolls announced that it’s selling its naval propulsion business for an undisclosed sum. The sale aligns with the firm’s strategy to focus on growth in defence sectors like combat and submarines.
Elsewhere, the Bank of England decided to hold interest rates at 5%. Yet governor Andrew Bailey did say that rates were “now on a gradual path down”.
The day before, America’s central bank cut rates for the first time in four years. Such moves are generally positive for stock markets.
However, the Rolls-Royce share price probably reacted to news that the company’s SMR (small modular reactor) unit had won a landmark contract in the Czech Republic.
It has been selected as the preferred supplier to state utility ČEZ Group for SMRs (mini-nuclear reactors). This puts Rolls-Royce on track to secure the first order from a European government.
So what
A single SMR power station will have the capacity to generate 470mw of low-carbon energy. According to Rolls-Royce, each one can provide enough electricity to power 1m homes for more than 60 years.
They will occupy approximately one tenth of the size of a conventional nuclear power site. And crucially, they will be factory-built, enabling completed modules to be transported by truck, train or barge. This should increase build-time certainty.
Rolls is still in the race to win the UK government’s competition for SMRs. However, like the delays associated with traditional nuclear power projects, the competition is running behind schedule.
If the company is chosen to progress to the next stage, I’d expect another jolt upwards in the share price. Or vice versa.
Back to reality
However, the first Czech nuclear reactor won’t be operational until at least the mid-2030s. I’ve seen cost estimates for each SMR at $1bn-$3bn.
Therefore, it’s not surprising to hear the company is looking to raise money by possibly selling a stake in the business. We don’t know the unit economics and it’ll be years before we do.
Meanwhile, the firm faces a lot of competitors in the space, including GE-Hitachi, NuScale Power and Westinghouse Electric. So that’s worth noting.
Based on projected earnings for 2024, the stock is on a forward price-to-earnings, or P/E, ratio of 29. It’s far from cheap.
Bottom line
Still, as governments become increasingly desperate to reach their net-zero targets, SMRs could evolve into a massive growth industry.
Indeed, the global SMR market is expected to reach $72.4bn by 2033, and a whopping $295bn by 2043, according to researcher IDTechEx. That represents a compound annual growth rate of 30% in this period.
I wouldn’t snap up the stock today based solely on the potential of SMRs. But there are plenty of other reasons to be bullish, from long-term growth in global travel to nations bolstering their defences.
I’m happy to keep holding my Rolls-Royce shares long term.
