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I Rolls-Royce (LSE:RR.) share price seems unstoppable. During 18 of the last 24 months, it has increased.
And in three of the six months it fell, it fell below 2.5%. As of August 2022, your average monthly increase has been 8.7%.
Those who dared to invest when the stock price hit a post-pandemic low saw a 12-fold increase in the value of their shares.
But I suspect the question all shareholders will be asking themselves is, can this bull run continue? And by definition, what will the price be at the end of December.
Let's take a look.
The crystal ball
Making stock price predictions is fraught with difficulty. That's because sometimes history is the only tool available, but it's not necessarily a good guide to the future.
If the Rolls-Royce share price were to continue to rise by 8.7% per month, it would close 2024 at 698p. But this seems a little optimistic.
Recently (1 August), the company upgraded its 2024 profit expectations. It is now forecasting an underlying operating profit for the year ending 31 December (FY24), of £2.1bn-£2.3bn. And free cash flow (FCF) of £2.1bn-£2.2bn (previously: £1.7bn-£1.9bn).
With many in the City on vacation, few commentators have had time to digest the good news. But JPMorgan quickly upgraded its earnings per share (EPS) forecasts to 18.6p (FY24) and 20.2p (FY25).
The investment bank was particularly impressed by the large increase in FCF as it is expected to come from improved profitability, rather than from the large number of prepaying customers under long-term contract arrangements, which has been a problem.
Based on the current (21 August) share price of 493p, JPMorgan's forecast suggests a FY24 forward price-to-earnings (P/E) ratio of 26.5. That's on the high side, especially a member of the FTSE 100 where the average is currently about half that amount.
However, some investors look at the PEG ratio to assess the value of money. If JPMorgan's forecast is accurate, 2024 will see a 35% increase in EPS. With a P/E ratio of 26.9, the PEG ratio would be 0.76.
That's close to 0.7, the level below which a share can be considered a bargain.
Amazing company
But if the stock price were 698p, its earnings multiple would be 37.5. This will be the same as the other members of the Magnificent Seven.
Ironically, Rolls-Royce's share price has been growing more like that of a tech giant than a company that has been around since 1906. But I don't think this level of estimation is justified. And given that many investors will be sitting on good paper profits, I'm sure a growing number will soon be tempted to cash in on their gains.
Final thoughts
In my opinion, successful investing is all about taking a long-term view. Looking four months ahead is too short an investment horizon to be meaningful. So I won't make any predictions except that I think the pace of growth in Rolls-Royce's share price will start to slow down soon.
It may fall as some investors take a breather. However, another big set of results — and an upward revision to future earnings forecasts — could lead to a bull run.
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