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Rolls-Royce Holdings (LSE: RR.) shares have kept on surprising investors. As of Tuesday’s (12 August) close, the share price had climbed 92% in the past 12 months. And it’s up a stunning 1,071% over five years.
So what’s this talk about it almost doubling again?
CEO Tufan Erginbilgiç has suggested using Rolls-Royce small modular reactors (SMRs) to power the growing demand for energy-hungry artificial intelligence (AI) could make it the UK’s most valuable company.
“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 told the BBC.
He puts global demand for SMRs at around 400 by 2050, which could mean a market worth more than a trillion dollars. And, naturally, he expects Rolls-Royce to take the lion’s share. Currently the company has deals to develop nine SMRs, six in the Czech Republic and three in the UK.
The biggest
AstraZeneca currently occupies the top spot in the FTSE 100, with a market cap a bit above $171bn. Rolls-Royce is in sixth place, valued at £91.3bn. So for Rolls to take the gold medal position? Yes, if nothing else changes, the share price would need to exceed 2,046p.
We’re looking at a forecast price-to-earnings (P/E) ratio of 44 for the current year. So a 2,046p share price would imply a P/E of around 82.5. And based on forecast 2027 earnings, it would mean a ratio of close to 60 even then.
That, of course, is based on current and near-term earnings forecasts. And the Rolls CEO is talking about some way in the future. He is, after all, estimating the SMR market 25 years from now. And even the most ambitious analyst isn’t going to be able to predict Rolls-Royce’s earnings by then with anything remotely resembling accuracy.
US vs UK investors
Speaking of valuation, there’s one angle that can be easy to miss. Around 50% of Rolls-Royce’s shareholders are in the US. And investors there are typically happy to place considerably higher P/E multiples on stocks than their counterparts here in the UK.
Would Tesla command a forward P/E of 250 if it listed only in London and had only British shareholders? I suspect not.
How realistic do I think these hopes might be? Well, we’re talking about the future up to 25 years ahead. And just about anything could happen over that timescale. Yes, Rolls might see its earnings soar in that time and it might take first place. But it might not. The other companies ahead of Rolls on the Footsie — including second-placed HSBC Holdings — might falter. But they might not.
The next 25 years
The only thing I’ll predict by 2025 is that the UK stock market will have continued its long-term generation of wealth. I’ve no clue which companies will lead the way by then, which is why diversification is so important.
Investors who share Tufan Erginbilgiç’s vision? I think they could do well to consider buying Rolls-Royce shares even now — as part of a diversified portfolio.
