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There’s no denying the stunning success story from Rolls-Royce Holdings (LSE: RR.) shares, up a huge 855% over the past five years.
Morgan Stanley and Jeffries recently set their targets at £20, for a further 52% increase. These things tend to be relatively short term too. So could the optimists be right? A couple of key developments make me think they might be…
Great growth story
Since Rolls-Royce shares started taking off, I’ve been waiting for a sentiment-led peak followed by a potential fall. That’s happened with every single growth stock story I’ve followed over the 30-plus years I’ve been involved in stock market investing. And some have been painful.
I see it as a near-inevitable transition. And after it happens, we can move into a longer-term sustainable path. The multi-bagger phase might be over, so let’s set our sights on long-term valuation rather than momentum.
Growth meets value
In this case, I’m happy it’s been a fairly gentle drop — so far, at least. And I reckon it leaves Rolls-Royce shares on an attractive valuation.
With broker forecasts predicting more earnings growth over the next few years, we could be looking at a price-to-earnings (P/E) ratio of around 23 by 2028. Is that good?
For one of the world’s great aerospace and defence companies — with a side order of nuclear power reactors ideal for AI data centres — I think it’s at least fair value.
Future performance
The second development I see continues a trend — Rolls-Royce has delivered the goods yet again. The following quote sums it up:
A strong start to the year enables us to raise our guidance for 2026… We now expect to deliver underlying operating profit of £4.7-£4.9bn and free cash flow of £3.8-£4.0bn. This builds further confidence in our mid-term targets. The actions that we have taken and investments we have made will drive significant profitable growth to the mid-term and beyond.
CEO Tufan Erginbilgiç, first-half results in July
I’ve been fearing a quarter when Rolls falls behind on its guidance. But it hasn’t happened so far. The boss seems like a master of managing expectations, and unlikely to over-promise.
Safe enough to sleep at night?
Still, should Rolls-Royce disappoint one quarter, I’d expect a sharp share price drop. And while I like the current valuation, I don’t see a big safety margin.
The 2,000p price target from those two brokers is at the upper end of the scale. And while I think it might be achievable, it’s quite a wide scale. The average, at 1,732p, still implies a 32% gain. But one analysts sees a 9% fall to 1,199p. That range of uncertainty definitely contributes to the risk profile.
On balance, I rate Rolls-Royce as one to consider for the long term — even if it doesn’t fit my own dividend-based strategy. But I have to stress the need for diversification. There are some great companies out there to help provide it…
Should you invest £5,000 in Rolls-Royce Plc right now?
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Alan Oscroft does not hold any positions in the companies mentioned.
