Shares of British engineering giant Rolls-Royce are under scrutiny this Monday following a notable portfolio adjustment by a prominent institutional investor. The Sequoia Fund, managed by Ruane Cunniff, reduced its holding in the fourth quarter of 2025. This decision comes despite the stock’s remarkable performance, having delivered total returns exceeding 120% over the preceding year. The fund’s rationale centers squarely on valuation, which it now deems stretched.
Soaring Valuation Metrics Prompt Action
In a late-January letter to shareholders, the fund’s managers explicitly cited the current price as the driver for the sale. They pointed to a forward price-to-earnings (P/E) ratio above 30, based on anticipated future earnings per share, describing it as “far from inexpensive.”
While the official P/E ratio stands at approximately 18, this figure adjusts to around 42 when one-off accounting effects are excluded. The powerful share price rally witnessed over the last twelve months has significantly inflated these valuation measures. Nevertheless, the fund’s leadership reiterated its confidence in the company’s ongoing operational turnaround.
Should investors sell immediately? Or is it worth buying Rolls-Royce?
Robust Operational Momentum Continues
From a business perspective, the outlook for Rolls-Royce remains solid. The Sequoia Fund’s analysis projects revenue growth of roughly 10% for 2025, accompanied by an estimated 35% surge in free cash flow per share.
The company’s Power Systems division is a particular bright spot, capitalizing on the artificial intelligence boom. Surging demand for backup power generators from data centers is fueling this segment’s growth, which saw an 89% profit increase in the first half of 2025. Furthermore, Rolls-Royce’s small modular reactor (SMR) business unit is anticipated to begin generating revenue from 2026 onward, with positive free cash flow expected by 2030.
On the London Stock Exchange, Rolls-Royce shares traded at £1,212.50 on Monday, posting a minor gain. The company’s market capitalization currently sits at approximately £100.5 billion.
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