Rolls-Royce Shares: A Five-Year Investment that Defies Expectations
The COVID-19 pandemic brought the global economy to a grinding halt, and the aviation industry was among the hardest hit. As a result, Rolls-Royce Holdings (LSE: RR.) shares plummeted, leading some to speculate that the company’s very existence was under threat. However, according to an article on Yahoo Finance, the company’s shares have staged a remarkable recovery, soaring 785% in the five years since.
As reported by Yahoo Finance, this surge would have turned every £5 invested in Rolls-Royce at the time into £44.25 today, or £100 into £885, and £10,000 into £88,500. While this is an impressive performance, it offers little guidance on the company’s prospects for the next five years. As Yahoo Finance notes, hindsight is a poor tool for making investment decisions, and it’s essential to look beyond past performance.
The article on Yahoo Finance quotes a friend of the author, who observed, “You sure know how to pick a stock that’s already gone up.” This phrase highlights the challenge of investing in shares that have already experienced significant growth. Rolls-Royce might make a breakthrough in aero engine technology tomorrow, boosting profits, or it might fall short of expectations, causing the share price to tumble.
According to Yahoo Finance, investors are increasingly expecting companies to beat expectations, and merely meeting forecasts can be seen as a disappointment. This could be a significant risk for Rolls-Royce shares, particularly given the substantial gain in recent years. The article suggests that some shareholders may be looking for an exit, and any sign of weakness could trigger a sell-off.
In light of these factors, Yahoo Finance advises that the only sensible approach to Rolls-Royce shares is to focus on fundamental valuations and forecasts. The article notes that the forecast price-to-earnings ratio is over 35, which is well above the long-term FTSE 100 average. However, earnings growth forecasts suggest that the P/E ratio could drop to around 26 by 2027, making the shares more attractive.
Yahoo Finance also highlights that forecasts predict net cash of £7.2bn on the balance sheet by 2027, which would adjust the effective 2027 P/E ratio to 23. This valuation appears attractive, although it may be sailing close to the wind. Nevertheless, Rolls-Royce shares are likely to be of interest to long-term growth investors, even after the significant increase in recent years.
The article concludes that while past performance is impressive, it’s essential to focus on the company’s future prospects. As Yahoo Finance notes, “Rolls-Royce shares have to be worth considering for long-term growth investors. Even if they’ve already gone up.” With a solid workforce, a drive for growth, and a potential for long-term expansion, Rolls-Royce shares remain an interesting opportunity for investors.
The investment potential of Rolls-Royce shares should not be taken as investment advice. As stated by Yahoo Finance, Alan Oscroft has no position in any of the shares mentioned, and The Motley Fool UK has recommended Rolls-Royce Plc. The views expressed in the article are those of the writer and may differ from the official recommendations made by The Motley Fool UK in its subscription services.
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