Over the past few years, Rolls-Royce (LSE: RR) has been a resounding stock market success. Rolls-Royce shares have soared 1,087% over that period.
Lately, though, the momentum has wobbled.
The share price is up 6% so far this year, slightly outpacing the 4% gain seen in the wider FTSE 100 index. But the share has been volatile, moving up and down as investors try to price the impact of everything from the Middle Eastern conflict’s impact on jet fuel prices to the outlook for defence spending.
Sometimes, when a share has a blazing run and then starts to stutter, it can mean it is peaking, before then heading downwards.
But that is not always the case. Sometimes, like a mountaineer scaling a peak, it is simply having a bit of a breather before starting the next leg up.
So, could there be more magic still to come from Rolls-Royce shares in future – and ought I to buy now?
The business might just be getting going
The dramatic turnaround in the share price over the past few years has not come from nowhere.
Some of it can be explained by a shifting demand environment. After lean years for civil aviation during the pandemic, passenger demand roared back. That was good for companies making or servicing aircraft engines, including Rolls-Royce.
A changing geopolitical environment, especially following Russia’s full-scale invasion of Ukraine, has also led to higher demand in the defence sector – another big part of Rolls’ business.
While the background demand picture has undoubtedly helped Rolls-Royce turn around its performance, that is not the whole story.
The company has made strategic choices about where to focus its efforts, it has cut costs and also set ambitious financial targets. That has helped it to make more of the opportunities that a strong demand environment presents.
But while that has been positive so far, it could be even more powerful over the long term. Laying the foundations can take time and involve some disruption, but building on them should help Rolls more fully realise its potential.
Rolls-Royce is aiming to perform even better in coming years. Its recent performance has helped build credibility when it comes to delivering on its targets.
If the business does well enough, that could potentially propel Rolls-Royce shares even higher from here.
So, should I buy and hold?
But there are some risks that could get in the way of that.
The Middle Eastern conflict threatens passenger demand, as we are seeing in statements from multiple airlines. That could lead carriers to cut back on spending plans for new planes and could also reduce the servicing frequency for existing ones.
Trading at 43 times earnings, I do not think Rolls-Royce shares offer me sufficient margin of safety to account for risks like that.
So while I will be keeping an eye on how the business performs from here, at the moment I am not tempted to invest.
Should you invest £5,000 in Rolls-Royce Plc right now?
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Christopher Ruane does not hold any position in the companies mentioned.
