Rolls-Royce (LSE: RR.) shares have had a rough spell. Over the past three months, they’re down 5.9%, slipping from 1,386p to around 1,248p today.
That means a £1,000 holding would have lost £59 and would now be worth only £941.
That isn’t a disaster in the context of a long-term holding, but it’s enough to make investors ask a fair question: why has the FTSE 100‘s biggest growth story stalled?
Where’s it headed?
I think the answer depends on what you expect from the business. Rolls-Royce is still in a correction, and the broader mood around civil aviation has become less comfortable because of the war involving the US and Iran, which is pressuring airline operations and fuel costs.
If that conflict drags on, some airlines could face jet fuel shortages. So the market isn’t just judging Rolls-Royce on earnings, it’s also weighing up geopolitical risk. And that can keep a share price stuck.
What matters next is whether the company can still grow through that noise. To its credit, it still has some encouraging numbers. Management expects revenue to reach £22.7bn this year and £27.54bn in 2028.
Its business diversity also helps, since it isn’t relying on civil aviation alone. That matters because it makes the group less exposed than some pure aerospace names.
On paper, the result is a stock that appears less stretched than many growth stocks, with a price-to-earnings (P/E) ratio of 18. But valuation’s never just about today’s earnings, is it? That’s where the debate gets interesting.
Other options to consider
In my opinion, AstraZeneca looks better right now. It has free cash flow of £8.62bn and stronger debt-to-equity coverage, which gives it more financial breathing space.
A discounted cash flow (DCF) model also suggests it’s trading at 41.8% below fair value — a big discount for a blue-chip name.
The catch is that profits could come under pressure from an upcoming patent cliff for its darling drug Farxiga this year. So the growth signals are clear, but so is the risk, and that is the real trade-off.
British American Tobacco‘s another one I’m looking at. It screens well not just for growth, but income too, with a dividend yield of 5%.
That sort of payout can be attractive when markets are jumpy. But tobacco shares come with an obvious long-term question mark, as regulation, litigation and changing habits all matter.
So it may look appealing on yield alone, but the future isn’t straightforward.
| Stock | Why it stands out | Main risk |
|---|---|---|
| Rolls-Royce | Revenue growth, diversified business mix | Near-term sentiment and geopolitics |
| AstraZeneca | Strong cash flow, DCF discount | Farxiga patent cliff |
| British American Tobacco | 5% dividend yield | Long-term uncertainty |
Final thoughts
For me, the lesson’s simple. When hunting for growth stocks, it isn’t enough to chase earnings growth alone. You need to look at valuation, cash flow and balance sheet strength too.
Rolls-Royce still has a long-term investment case that’s worth considering, but investors should expect some short-term pain.
As I’ve outlined here, there may be better options on the FTSE 100 right now, and that’s worth thinking about before making any decisions.
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Mark Hartley owns shares in AstraZeneca and British American Tobacco
