Picture supply: Rolls-Royce plc
Rolls-Royce (LSE:RR.) shares have risen greater than 1,000% over the last 5 years. Up nearly 87% thus far in 2025, too, the FTSE 100 agency’s spectacular bull run is exhibiting no indicators of slowing.
I can’t assist however really feel, although, that Rolls shares are actually wanting unreasonably costly. At £10.98 per share, the engine builder trades on a ahead price-to-earnings (P/E) ratio of 38.2 instances.
At these ranges, there’s an opportunity the corporate’s shares might wrestle to rise additional. Moreover, a chunky valuation like this will likely immediate a pointy worth correction if the broader inventory market falls or information circulation begins to underwhelm.
Might Rolls’ share worth now be the FTSE‘s most overpriced share? And the place might the inventory be heading subsequent?
Excellent news
Make no mistake: Rolls’ restoration from the depths of the pandemic is nothing wanting unbelievable.
Because the airline trade has recovered, large-engine flying hours have surged, boosting demand for the corporate’s high-margin aftermarket providers, comparable to upkeep and spare components. This varieties the spine of Rolls’ operations.
However that is solely a part of the story. Its shares have risen as buyers have wholeheartedly purchased into chief govt Tufan Erginbilgiç’s transformation technique.
Contract negotiations, cost-cutting, and effectivity measures all depart Rolls a extra environment friendly, leaner machine than earlier than the pandemic. It’s anticipating underlying working revenue of £3.1bn to £3.2bn this 12 months — up from £2.5bn in 2024. Free money circulation is anticipated to leap from £2.4bn final 12 months, to between £3bn and £3.1bn in 2025.
There are good causes to anticipate the enterprise to satisfy these targets and report additional progress subsequent 12 months. The worldwide journey trade stays largely resilient, whereas the outlook for the defence sector continues to enhance. Rolls can be making progress with its small modular reactors (SMRs).
Hazard zone?
Buyers have grown accustomed to fixed excellent news from Rolls. And my concern is that this might create an issue in a while. Any disappointment might puncture that sense of invincibility across the firm, and set off a pointy pullback within the shares.
And be in little question that the corporate faces extreme challenges that would derail market condifence.
In November’s newest replace, Rolls flagged up the “continued provide chain challenges” that would drive costs up, injury its aftermarket providers unit, and hamper challenge supply.
This isn’t all. It faces extreme competitors throughout every of its markets, and future contracts are under no circumstances assured. Extra instantly, it might see revenues development gradual to a crawl if the worldwide financial system weakens, hitting the airline sector and demand for its engine providers.
Right here’s what I’m doing
At in the present day’s ranges, the corporate’s ahead P/E ratio is greater than thrice the broader FTSE 100 common.
I wouldn’t say that Rolls-Royce’s share worth is the Footsie’s most overvalued enterprise in the present day. There are many high-priced firms with far poorer funding potential in the present day.
It might effectively proceed to rise in worth. However at in the present day’s costs, I’m not tempted to purchase the engine builder for my portfolio.
