As I write, Rolls-Royce (LSE:RR.) shares have convincingly smashed via the 900p barrier and are buying and selling at an all-time excessive. The long-lasting aerospace and defence firm is now the sixth most dear firm within the FTSE 100 index, with a market cap simply shy of £77bn.

Following the spectacular 709% rally for the Rolls-Royce share price over 5 years, have new buyers missed the boat? Or can the shares proceed to climb increased from right here?

Right here’s my take.

Nuclear enhance

Since CEO Tufan Erginbilgiç took the helm at Rolls-Royce in January 2023, shareholders have turn into accustomed to fabulous earnings stories.

Some highlights embrace a £1.8bn enchancment in working revenue since 2022 to £2.5bn, and an working margin of 13.8%, in comparison with 5.8%. From civil aerospace to defence to energy methods, the enterprise is firing on all cylinders.

And the excellent news retains on coming. Vitality Secretary Ed Miliband simply introduced an enormous funding in Britain’s nuclear vitality infrastructure.

Heading off competitors from three abroad corporations, Rolls-Royce has been chosen by the federal government as the primary agency to construct small modular nuclear reactors (SMRs) within the UK. Over the present spending evaluate interval, £2.5bn of public funds have been earmarked for SMR building.

These small-scale nuclear fission reactors provide larger flexibility than conventional large-scale nuclear energy vegetation. Their typical footprint is just the dimensions of two soccer pitches, they usually’re cheaper and faster to construct.

The SMR tasks shall be executed by an impartial enterprise referred to as Rolls-Royce SMR, however the firm’s majority stake is owned by Rolls-Royce. Accordingly, shareholders within the FTSE 100 agency stand to profit from the inexperienced mild given to construct three SMRs within the UK, with the potential of extra to return.

Rolls-Royce SMR is a pioneer on this fast-growing house. It’s 18 months forward of the competitors, and Erginbilgiç expects its worth will “grow materially” over the approaching years.

Valuation threat

It’s simple to be exuberant about Rolls-Royce shares with a lot constructive information flying round. Nonetheless, the corporate’s present valuation could be sobering for some would-be buyers.

A ahead price-to-earnings (P/E) ratio above 37.7 places the inventory properly above the typical for FTSE 100 corporations. As well as, a price-to-sales (P/S) ratio of practically 4 means that the shares might be overvalued. Normally, analysts prefer to see a quantity beneath one when searching for a price funding alternative.

At these sky-high multiples, the inventory’s priced for perfection, and there’s scant room for error. Development has to reside up to expectations. Granted, Rolls-Royce has a large moat, however even a small earnings miss may ship the shares plummeting.

It’s nonetheless a thumbs up for me

I personal Rolls-Royce shares, however my entry level was considerably decrease than right this moment’s price, with a median price per share of 142p. I’m snug with my current publicity, so I received’t be shopping for extra right this moment, however I received’t be promoting both.

For buyers who don’t personal the inventory, it’s nonetheless value contemplating. The enterprise is among the most dynamic development alternatives within the FTSE 100, and I’m massively impressed with the administration group.

That mentioned, at right this moment’s valuation, it’s not the discount it as soon as was. New buyers could be sensible to keep away from overexposure through portfolio diversification.