Rolls-Royce shares are on a roll. Will it last?

The value of aeronautical engineers Rolls-Royce (LSE: RR) has achieved rapid heights. Rolls-Royce shares are up 65% since October. They are still 6% below where they stood a year ago, but their recent rapid climb suggests they are benefiting from some positive momentum.

Can it go higher from here – and what does that mean for my own stake in the company?

Investors are excited

For the past three years, Rolls-Royce shares have been worried about demand for civil aviation. Pandemic restrictions mean fewer passengers take to the skies. Demand has gradually returned but remains below pre-pandemic levels.

With China recently reopening, many investors are hopeful that global civil aviation demand will return to previous levels, and possibly even beyond. That should be good for Rolls-Royce in more ways than one. Service revenue for the installed engine base should increase as the number of flying hours increases. There is also the prospect of higher sales for the new engine, if airlines add more flights to meet rising demand.

Rolls-Royce has cut costs during the pandemic and has sold assets, helping the company reduce debt on its balance sheet. The positive impact of these moves on the company’s finances will hopefully become more apparent as profits rise.

Stock value

I think the strong price growth we have seen in Rolls-Royce shares lately reflects the City’s optimism that the company can now benefit from its strong position in the engine industry.

Really, that’s the only explanation I can think of to justify the jump in share prices.

Last year, the company made a post-tax profit of £124m. Based on that, a current market capitalization of over £9bn looks huge.

I think the price makes sense only if it is considered as anticipation of significantly higher future earnings. I think that’s possible. Sales growth and inflation can help boost earnings. A leaner cost base should be good news for profit margins.

Could it help Rolls-Royce shares move higher? I can. But what happens depends partly on how well Rolls can do commercially.

Further price increases this year may depend on the company staying on track with current production as well as securing large new orders. It has improved in the final score, for example in the power division. It saw a record order intake in the four months to the end of October.

Possible risks

But whether the commercial momentum will remain strong remains to be seen. Cost inflation can affect profits.

It remains to be seen whether the company’s previous cost cutting will affect efficiency as the company increases production levels. There is also the risk that airlines will skimp on ordering new planes, as many of their balance sheets are still wounded by the year of the pandemic.

The risk could see Rolls-Royce shares retreat.

On balance, I am confident about the company’s prospects and think that 2023 could increase Rolls-Royce’s share price. I have enough risk tolerance, so will not buy again.