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We’ve all seen what the Rolls-Royce (LSE: RR) share price can do. For investors who’ve been living under a rock for the past three years, the FTSE 100 engineering heavyweight has climbed a staggering 803% in that time. That would have turned a £10,000 investment into more than £90,000.
Sadly, I’m not sitting on anything quite so impressive. I spotted its recovery potential early, but didn’t have much spare cash to hand. Then, midway through the rebound, I had to sell what I had to cover something else. Also, I simply didn’t believe the shares could keep going like they did.
But they did. They still are. Rolls-Royce shares are up another 80% over the past 12 months.
Flying FTSE stock
Good things never last forever but Rolls’ resilience has been striking. CEO Tufan Erginbilgiç has driven a stunning transformation. Keeping the momentum going may prove just as big a challenge.
Full-year 2024 results, released in February, showed underlying operating profit jumping 57% from £1.6bn to £2.5bn. Civil Aerospace, the company’s largest division, delivered a margin of 16.6%, helped by stronger performance in both widebody engine servicing and business jets.
Free cash flow surged to £2.4bn, and net cash flipped from a £2bn debt to £475m in hand. Not bad for a company on life support just a few years ago.
What’s more, the dividend is back, albeit with a modest 1% forecast yield. Plus there’s a £1bn share buyback planned for 2025. The board clearly still believes the company’s shares are good value, even if the price-to-earnings ratio has climbed to 35. It was above 40 just a couple of months ago.
Stock forecast
Analysts covering the stock have pencilled in a median price target of 820p for the next 12 months. That’s around 10% higher than today’s price of just under 745p. Add in the dividend, and that gives a potential return of 11%. If that plays out, a £10,000 stake in the stock would climb to £11,100. Frankly, I’d take that.
I bought back into Rolls-Royce four or five months ago and I’m already sitting on a tidy 70% gain. Of course, I’d love to bag another 803% over the next few years, who wouldn’t? But those days are behind us. All I’m hoping for now is steady progress.
There are still risks. The firm’s work on Small Modular Reactors (SMRs) is ambitious, but the UK government keeps dragging its feet. Delays in picking a supplier could see Britain miss out on building the supply chains needed to lead in this area.
Slower growth in store
There’s also the cost. Rolls-Royce’s SMR division chalked up a £78m loss in 2024, as R&D spending shot up again. New nuclear tech isn’t cheap to develop, and profits are a long way off. Global supply chains have been threatened by everything from the UK war to Donald Trump’s trade war. Tariffs could hit business travel and income from miles-flown maintenance contracts. Inflation isn’t beaten yet.
The red-hot gains may be gone, but if Rolls-Royce can be a slow burner from here, I won’t be complaining. I still think its shares are worth considering for new buyers, provided they temper their expectations.
