As I write on Tuesday morning (8 April) the Rolls-Royce Holdings (LSE: RR.) share price is up 6%.
It’s a rebound after the initial fallout from President Trump’s global tariff war. Since a peak of 818p in March, Rolls-Royce shares fell 22% to close Monday at 635.8p.
Jumping ship?
Investors who’ve watched growth shares for any time will know that a strong bullish spell is often knocked off-course by a specific event. People see the fall and decide to get off the short-term ride. And we all nod sagely and decide that yes, the shares maybe were getting a bit pricey.
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Is that what’s happening to Rolls-Royce shares now? I don’t think so.
For one thing, the stock market rout kicked off by Trump’s unique take on economics really says nothing about the long-term prospects for the company. Or for any global company, for that matter.
Valuation
And Rolls-Royce shares really haven’t reached the kind of sky-high valuations that often precede a growth bubble burst. At least, I don’t think so, judging by what the analyst forecasts say.
Maybe the spike kicked off by February’s full-year results might have pushed up a bit far, but I don’t think I’m seeing more than that.
We’re looking at a price-to-earnings (P/E) ratio of about 25.5 for 2025. Earnings per share growth forecasts out to 2027 are solid rather than stunning. But they’d still drop the P/E to around 21 by then.
The P/E doesn’t come close to painting the whole picture and investors need to consider far more measures. But things gets better.
Adjust for cash
Rolls has turned round its debt position of just a few years ago in spectacular fashion. Not only is net debt wiped out now, but Rolls is on for £1.6bn net cash this year. And the analysts see that soaring to nearly £7.2bn by 2027.
A pile of cash adds to the value of a company. I mean, the business plus billions in cash is worth more than just the business, right? If I adjust these P/E forecasts to allow for the cash and work out an equivalent for the business alone, something interesting happens.
I get a cash-adjusted effective P/E for 2025 of 25, just a bit lower. But the adjusted 2027 P/E drops to 19. That’s not down at banking sector levels, but it makes it look even less like a bubble valuation to me.
Tariff risk
While all this might look good, we shouldn’t simply ignore the tariff challenge. Rolls is in a global business, one of the world’s few large-scale aero engine makers. And one of its big markets might suddenly have been made a whole lot harder. Even without that specific risk, a global slowdown will likely make an impact.
If Trump’s tariffs remain where they are, I expect the whole industry will feel pain. And it could be more than a short-term effect.
It might make sense to wait and see where this all goes. But then, I think long-term investors should definitely consider a price dip like this as a possible opportunity.
