In the first week of the month (April 2025), the Rolls-Royce (LSE: RR.) share price suffered its largest single-week drop in over five years. Back in mid-March of 2020, after the Covid pandemic hit, the stock fell 25% in one week. Since then, it’s made a spectacular recovery, climbing 452% over the past five years.
But here we are again, only this time it’s US trade policy that’s wiped 15% off the company’s share price.
So is that the end of Rolls’ spectacular five-year rally? I wouldn’t panic just yet — the stock may be down but it’s certainly not out. Let’s look at some of the recent developments driving growth and why Rolls might just emerge from this storm better than ever.
A comeback king
Rolls has been one of the most impressive comeback stories of the past decade. After losing 87% of its value in 2019 and 2020, many thought it was over for the aerospace and defence manufacturer. But in 2024, it had a great year, with revenue increasing by nearly 16% to £17.8bn, surpassing analyst expectations. Operating profit rose by 57% to £2.5bn and free cash flow doubled to £2.43bn — an impressive boost in cash generation.
The spectacular turnaround has been largely attributed to strategic initiatives put in place by CEO Tufan Erginbilgiç. His hands-on approach and aggressive restructuring — with a strong focus on commercial optimisation and cost efficiencies — has been praised by many. Now, many of those who bemoaned the stock five years ago probably wish they had bought.
Is it too late now?
Growth forecast
Analysts remain optimistic, with operating profit forecast to reach between £2.7bn and £2.9bn this year. Ten out of 18 analysts have a Strong Buy rating, with only one Strong Sell and four Holds. Yet the average 12-month price target remains moderate at only 780p — a 17.5% increase from today’s price of around 660p.
That’s not all that surprising, considering the recent growth (although I’ve been saying that for months and somehow it keeps climbing). Its price-to-earnings (P/E) ratio has risen considerably over the past year but at 22, it is still within an acceptable range.
Usually when I see a stock rise almost 500% in five years, I expect the P/E ratio to be through the roof. In Rolls’ case, it simply spent much of the past five years heavily undervalued.
But that doesn’t mean it’s infallible.
Risks to consider
Rolls is fairly susceptible to supply chain disruptions, particularly raw material shortages. The current geopolitical situation in Europe exacerbates this, not to mention causing volatile oil prices. Plus, much of its revenue is dependent on defence spending and is tied to the cyclicality of the aerospace industry.
All the above issues pose a risk to Rolls’ bottom line and could hurt the share price.
So what’s the verdict?
Operations-wise, Rolls doesn’t look like a company on the brink of collapse. However, the recent price dip reveals just how sensitive it is to the current market turmoil. In many ways, it’s the opposite of a defensive stock: it could soar again if the economy stabilises, or take a more devastating hit if it doesn’t.
Highly risk-tolerant investors may see it as worth considering, but I’m looking for something a little less nerve-wracking.
