It has been a exceptional few years for aeronautical engineer Rolls-Royce (LSE: RR). Trading in pennies as just lately as 2022, Rolls-Royce shares have soared 616% over the previous 5 years. Wow!

Might there be causes to remain optimistic concerning the enterprise outlook for Rolls? I reckon so.

Listed here are three.

1. Ongoing excessive demand in civil aviation

Commerce coverage disputes have raised the spectre of better complexity when promoting airplane engines, in addition to probably decrease journey demand.

However whereas I see these as dangers, they’ll obscure the truth that civil aviation has been on a roll up to now a number of years.

Demand from airways for brand new engines stays strong. Rolls’ underlying income in civil aviation final 12 months grew 24% organically.

A big put in base and excessive utilization implies that there’ll seemingly be robust demand for servicing too. With Rolls’ massive put in base of engines, that’s excellent news for the enterprise. Because it mentioned in a buying and selling replace this week, the enterprise is seeing “strong aftermarket revenue growth driven by higher shop visit volumes”.

The agency additionally mentioned that it expects “to offset the impact of announced tariffs on our business through the mitigating actions we are taking”.

2. Strong demand development in defence

Whereas civil aviation is the core of Rolls-Royce’s enterprise – and so its share price might be closely affected by it – defence can be a sizeable division. Final 12 months, it delivered £4.5bn in income for the corporate. That was a couple of quarter of the agency’s complete.

A deteriorating safety atmosphere in Europe, coupled with US geopolitical uncertainty, is more likely to see defence spending develop at a robust clip in years to come back. That must be excellent news for UK defence shares together with Rolls.

Final 12 months, its underlying defence revenues recorded natural development of 13%. As the corporate reiterated this week, “In Defence, demand remains robust across our portfolio of products with strong order intake”.

3. Ongoing drive to enhance profitability

These two components are exterior. However I see an inside development driver too that would assist push Rolls-Royce shares even larger: improved productiveness feeding by means of to larger revenue margins and earnings.

Rolls-Royce shares soared in recent times partly attributable to an aggressive set of targets for key monetary metrics.

To buyers’ delight, the corporate has since raised these targets, overlaying the interval till 2028. This week, it mentioned, “good progress on our transformation and the actions we are taking” gave it confidence to affirm its monetary efficiency targets for this 12 months.

Heaps to love, so ought to I purchase now?

I see these potential development drivers as actual and substantial, so ought to I purchase?

I don’t plan to take action.

The present Rolls-Royce share price-to-earnings ratio is 26. That valuation is simply too excessive for me.

Why? Briefly, the corporate (and its rivals) are topic to massive potential exterior shocks which can be outdoors its management.

Tariffs are merely the most recent instance. A pandemic, large-scale climate occasion, terrorist assault, or recession hurting civil aviation calls for are among the many others. We now have seen it earlier than and eventually I count on we are going to see it once more.