Red-hot engineering firm could boom in value as Burnham eyes defence spending hikes – £10 a month could turn into £9.5k

INVESTORS are excited about a red-hot stock that could continue to soar in value if defence spending is boosted. This company benefited from a multi-billion-pound investment unveiled by Prime Minister Andy Burnham last week, and its share price has already skyrocketed by more than 1,000% since 2021. Here, experts reveal why they believe it could go higher still – and why it could still be worth investing. Prime Minister Andy Burnham announced a multi-billion-pound defence investment last week Credit: PA The engineering firm has been one of the best performers on the FTSE 100 in recent years Credit: Getty Rolls-Royce Holdings is a major British engineering company that makes engines for planes like the Airbus A350 and Boeing 787, as well as defence equipment and power systems. It’s not to be confused with its sister company Rolls-Royce Motor Cars, which is the luxury carmaker owned by BMW. The engineering firm has been one of the standout performers on the UK stock market in recent years, following a major turnaround. Its shares have soared by a whopping 1,240% over the past five years, earning it “ten-bagger” status. Stocks achieve this sought-after status when their value increases by 10 times or more. When you buy a stock, you are buying a small slice of a company. If you had invested just £10 a month over the last 10 years, you would now have £9,475, according to analysis by Finder. That includes £1,200 of your own money, so that’s a huge investment return of £8,275. Rolls-Royce’s fortunes have changed dramatically in the last few years, after its share price plummeted during the COVID pandemic. With international flights all but suspended, companies related to air travel were hit hard. By December 2022, it cost just 93p to buy a share in the company. But chief executive Tufan Erginbilgiç, who was brought in three years ago, has been credited with steering the company through a remarkable turnaround. Now, it costs more than £15 to buy a share. Richard Hunter, head of markets at interactive investor, said: “The ‘burning platform’ which the current CEO inherited more than three years ago has been transformed into a business which is now, quite simply, on fire.” He said Rolls-Royce’s targets are being “consistently blown away” and there could be more growth to come. What are the risks I need to watch out for? BEFORE you start investing, you need to understand the risks. The return you make will depend on how much you invest and where you put your money. As we have seen recently, the stock market can dramatically fall. The US market last year saw its biggest drop since the start of the Covid pandemic after President Donald Trump announced plans to introduce punitive tariffs on goods imported from other countries. The UK’s own stock market, the FTSE 100, fell by more than 10 per cent after the news. You must be prepared for the value of your investment to fall as well as rise – so only invest money you can afford to lose. You need to be willing to invest cash for at least five years to mitigate any dips in the market and allow your money to recover. If you can’t afford to lock up your money for this long, investing may not be right for you. It’s usually better to drip-feed money into your investments instead of putting down a big chunk of money in one go. Before you start investing, experts say you should have a minimum of six months’ of wages in a savings account for emergencies. If you’re investing in Rolls-Royce, your money will be spread across three major areas: military defence, aerospace and AI infrastructure. The company has so far benefited from a boom in demand for aircraft engines and power for data centres. And it could also be set to gain from European nations, including the UK, expanding their defence budgets. NATO, which is a military alliance of countries from Europe and the US, has said its member nations should be spending 3.5% of GDP on core military capabilities by 2035. Andy Burnham has committed to meeting the NATO target by 2035, and he’s now under pressure to increase spending to 3% even earlier. But with former defence secretary John Healey now in charge of the country’s finances as Chancellor, experts are predicting the UK could commit to more military spending. Last week, Mr Burnham unveiled an £8.4billion investment in nuclear submarines – and Rolls-Royce will profit directly from this. Four nuclear armed submarines, including the HMS Dreadnought, will replace the Royal Navy‘s current Vanguard Class submarines. Rolls-Royce makes the nuclear propulsion system that will power the subs. Chris Justham, chief distribution officer at 7IM, says: “The ongoing geopolitical uncertainty has seen investors flock to defence stocks and this doesn’t look like it’ll end any time soon.” Rolls-Royce gets a quarter of its revenue from defence, and Chris says increased demand for its military aviation and submarine programmes “should translate to more orders”. That’s encouraging for how well the company could do in the next few years. But remember, it’s always less risky to invest in a fund than in individual shares. A fund is a bit like a shopping basket full of different sorts of investments – there may be dozens or even hundreds of stocks that it invests in, as well as assets like gold or bonds (a government loan). It can be a less risky investment because it distributes your money across multiple assets, so if one stock drops in value, you won’t feel the hit as much. Funds that include a high concentration of Rolls-Royce shares include the iShares Europe Defence UCITS ETF, which has had a return of around 9% over the last year. There’s also the Amundi Stoxx Europe Defense UCITS ETF, which has an annual return of around 8%. Why could it still be worth investing now? An artist’s impression of the HMS Dreadnought submarine which is being invested in Just because a stock has had great returns so far, it doesn’t mean it will continue to do well. But investment experts are still keen on Rolls-Royce stocks, with most major analysts rating it as a “Buy” currently – which means they would recommend you buy now. Out of 19 analysts who have rated the stock, 16 rated it as Buy, three rated it as Hold (which means keeping hold of it if you own it already), and none recommended selling. Jason Hollands, managing director at Bestinvest by Evelyn Partners, points out the company benefits from not just operating within the UK. “While Rolls-Royce is an iconic British engineering company and a constituent of the FTSE 100, it is very much a global business, with around three-quarters of its revenues generated outside Europe,” he said. That means it can win contracts with other European nations planning to boost their defence spending, and also capitalise on a rebound in long-haul air travel. 7IM’s Chris Justham says Rolls-Royce also stands to benefit from countries in Europe and Asia wanting to pivot to reliable sources of energy such as nuclear power. This has partly been prompted by rocketing oil prices causing fossil fuels to become more expensive. Plus, Morningstar’s Loredana Muharremi said the company’s aerospace business is benefiting from more profitable engine-service contracts. And there is growing demand for backup and primary power for AI data centres. On top of that, Rolls-Royce has started developing technology to create engines for narrowbody jets again. Ms Muharremi said if the company can win a major contract with Airbus or Boeing, it could create extra revenue for decades. This is currently not factored in to the share price, so it’s an opportunity for it to increase further. Any risks? Make sure you’re aware of all the risks before you consider investing in Rolls-Royce Credit: POOL/AFP via Getty Images Expectations for Rolls-Royce are already high, so there is more pressure on the company to perform well. Morningstar’s Loredana Muharremi says in the civil aerospace sector, the risks include supply chain disruption, higher costs and failure to deliver improvements on engine durability. Meanwhile the defence industry has a reputation for project delays and cancellations, which can hit share prices. Chris Justham says investors should be “wary” with most defence stocks as valuations are currently high. “Trading at a premium is fine, but operational missteps or a slow down in demand leaves little room for disappointment,” he said. Plus, investment in AI data centres could not match up to expectations. Like with any stock, the share price can dip suddenly, or it may not perform as well as you hoped. That’s why it’s important to be prepared to stick out your investment for the long run, rather than panicking if the share price dips. You should aim to keep your money locked away in your investments for at least five years to ride out any bumps in the market and allow your money to build back up.