The best-performing share in the FTSE 100 in 2023 was Rolls-Royce (LSE: RR). Last year it was among the highest climbers again. In fact, the Rolls-Royce share price is now 513% higher than where it was at the end of 2022.
That is an incredible performance for any share.
But I think it is particularly impressive for a mature company that has been around for many, many decades and operates in a typically slow-moving business area.
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Past performance is not necessarily a guide to what will happen in future. But might the Rolls-Royce share price have a bumper 2025 – and ought I to add it to my portfolio?
Lots going right
The past couple of years have seen the share price surge in part because of a changed business outlook.
Demand has grown, both in the civil aviation business and with an upswing in defence spending by many western governments. Meanwhile, Rolls has shaken off its weak performance and massive cash burn of the pandemic years.
But what I think really set the share on fire in the past couple of years was a new, more assertive management style. That has included getting rid of some non-core businesses, aiming to cut costs and setting ambitious targets for medium-term financial performance.
It doesn’t look like a bargain
The targets are indeed impressive – if they are delivered. For now, however, I think the Rolls-Royce share price already factors in high expectations.
At the moment, it trades on a price-to-earnings (P/E) ratio of 21. That is not outrageously high, in my opinion, but by the same token I would not describe it as a bargain.
It could be seen as a bargain on the basis that the prospective P/E ratio is lower. After all, if the company can improve its profitability as it hopes to, earnings per share ought to increase.
That prospect alone could see the Rolls-Royce share price increase this year, especially if the company issues upbeat news about how it is performing relative to its medium-term goals.
Why I’m not tempted at this price
The reverse is also true though.
If there is even a squeak of disappointment – and Rolls has decades of mixed performance behind it – I think the current share price offers me no margin of safety. In such a situation, I would not be surprised to see a sharp price fall.
An especial concern I have about this industry, including Rolls, is that civil aviation demand can be affected by factors over which airlines let alone engine makers have no control. That could be a pandemic, volcanic eruption, terrorist attack, oil price spike or simply a sharp recession.
Again, I think the current Rolls-Royce share price offers me no margin of safety to mitigate such risks. So, while I will watch with interest how it performs in 2025, I have no plans to invest.
