A sustained recovery in the aviation industry has powered Rolls-Royce (LSE:RR) shares through the stratosphere. The engineer’s shares are up 151% in the past year alone.
With a profits-boosting restructuring continuing, too, I wouldn’t be surprised if the Rolls share price keeps on rising. City analysts are forecasting strong earnings growth all the way to 2026, which, if correct, could underpin further price gains.
Year
Annual earnings per share
Annual growth
2024
17.98p
31%
2025
21.16p
18%
2026
24.62p
16%
That said, there are also potential stormclouds coming the company’s way. And with a forward price-to-earnings (P/E) ratio of 30 times, signs of weakness could cause the share price to slump.
I’m not prepared to buy the FTSE 100 engineer, and especially at current prices. Here are three reasons why.
#1: Supply chain strains
Let’s talk about supply chain issues in the aerospace industry first. Several engineers (including Rolls itself) have warned of the threat to sourcing parts throughout 2024. Senior even warned on profits last week due to supply problems hitting deliveries at Airbus and Boeing.
Today, Rolls was in the crosshairs after IAG-owned British Airways said it had cancelled hundreds of long-haul flights. This was due to “delays to the delivery of engines and parts from Rolls-Royce“, the airline told Reuters, adding (rather worryingly) that, “we do not believe the issue will be solved quickly“.
Rolls has previously warned that supply-related problems could endure for two years. While it has said “we are proactively managing” such problems, Monday’s news suggests it may be finding the challenge a tough one.
#2: Tech issues
Product failures are a constant threat to engineers. Unfortunately, Rolls has also been in the news related to hardware issues affecting fuel nozzles in the Trent XWB-97 power unit.
Last month, Cathay Pacific grounded dozens of planes after an engine issue on one of its Airbus A350s forced it to turn around mid-flight. The European Union Aviation Safety Agency (EASA) ordered an investigation of Trent XWB-97 units in the aftermath, the results of which could be released soon.
EASA has described the tests as “precautionary“, but an adverse result could be hugely damaging for Rolls’ profits, not to mention its reputation.
#3: Civil aviation slowdown
My final concern for Rolls relates to the broader state of the civil aerospace market.
Defence revenues remain strong and look set to remain so as the geopolitical landscape worsens. The company could also see revenues rise as countries ramp up construction of small modular nuclear power plants.
However, the Footsie firm still relies on strong engine and aftermarket service demand from airlines to drive earnings. And news from some major carriers (like Delta and American Airlines) has been less encouraging of late as the post-Covid travel boom fizzles out.
This cooldown could continue, too, if the US and Chinese economies struggle for traction. Rising oil prices might also exacerbate the downturn if the crisis in the Middle East worsens.
I don’t think these threats are baked into Rolls-Royce’s sky-high valuation. So I’d rather buy other UK shares right now.
The post 3 reasons why I’m avoiding Rolls-Royce shares like the plague! appeared first on The Motley Fool UK.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Rolls-Royce Plc and Senior Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
