Image source: Rolls-Royce plc
The best performing stock in the FTSE 100 in 2023 it was Rolls-Royce (LSE: RR). Last year he was again among the highest climbers. In fact, Rolls-Royce's share price is now 513% higher than where it was at the end of 2022.
This is an incredible performance for any stock.
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 area of business.
Past performance is not necessarily a guide to what will happen in the future. But could the Rolls-Royce share price have a bumper year in 2025? Should I add it to my portfolio?
Many things are going well
Recent years have seen a rise in share price partly due to a change in business prospects.
Demand has grown, both in the civil aviation business and with an increase in defense spending by many Western governments. Meanwhile, Rolls has recovered from its weak performance and huge cash burn of the pandemic years.
But I think what really drove the stock in recent years was a new, more assertive management style. That has included shedding some non-core businesses, aiming to cut costs and setting ambitious targets for medium-term financial performance.
Doesn't seem like a bargain
The goals are certainly impressive, if met. For now, however, I think Rolls-Royce's share price already takes high expectations into account.
At the moment, it is trading on a price-to-earnings (P/E) ratio of 21. In my opinion, this is not outrageously high, but I wouldn't describe it as a bargain either.
It could be seen as a bargain on the basis that the future The P/E ratio is lower. After all, if the company can improve its profitability as expected, earnings per share should increase.
That prospect alone could send Rolls-Royce's share price higher this year, especially if the company releases upbeat news about its performance relative to its medium-term goals.
Why am I not tempted at this price?
However, the opposite is also true.
Even if there is a modicum 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 wouldn't be surprised to see a sharp price drop.
A particular concern I have about this industry, including Rolls, is that civil aviation demand may be affected by factors over which airlines, let alone engine manufacturers, have no control. It could be a pandemic, a volcanic eruption, a terrorist attack, a spike in oil prices, or simply a sharp recession.
Once again, I believe that Rolls-Royce's current share price does not offer me any margin of safety to mitigate those risks. So while I will watch its performance in 2025 with interest, I have no plans to invest.
