Image source: Rolls-Royce Holdings plc
I Rolls-Royce (LSE:RR) share price has risen 148% in the past 12 months, defying the expectations of many investors. The company’s return to bankruptcy has been impressive to say the least.
But that happened in the past. Investors wonder if FTSE 100 the share price can really go up. However, experts who cover the stock suggest that it is possible. Let’s take a closer look.
Finding the right amount
Analysts – of which there are 17 – covering Rolls-Royce have a positive view of the stock. That is indicated by eight Buy ratings, four Outperform ratings, three Hold ratings, one Underperform and one Sell.
However, it is not straightforward. Because Rolls-Royce’s share price has soared so quickly, it is actually trading above its share price target by 2.5%.
That would be a bad sign if it weren’t for the fact that recent re-ratings have been positive. The last four reviews – done in November and October – were all buy ratings. This coincided with improved share price targets – a high of 675p.
So as analysts revise their coverage of the stock, based on recent re-ratings, we may see the share price rise significantly.
Why are analysts cheap?
Analysts are active on Rolls-Royce stock for several reasons. But it all comes from a significant improvement in its financial performance over the past two years, with operating profit rising and free cash flow projections raised.
The company’s margins in the Civil Aerospace division have improved significantly, from 2.5% in 2022 to 18% today. And the defense sector is seeing supportive trends from the country’s top risks.
In addition, Rolls-Royce also received its first investment grade rating in nearly four years, indicating improved creditworthiness. Additionally, investors clearly see some potential in the company’s involvement in small nuclear reactor projects and potential deals with European countries have contributed to the positive outlook.
Still worth considering?
Rolls-Royce is scheduled to deliver a trading update on 7 November, so there is likely to be significant volatility. Stocks with growth potential – as are the Rolls – can be particularly volatile if quarterly earnings surprise investors.
At this point, it is certainly worth highlighting the downside. At 31 times forward earnings, the market will react negatively to negative commentary, low earnings, or disappointing guidance. Even the US election can damage confidence in some sectors of the business, including defense.
However, the company’s long-term trajectory is up. Fundamentals and earnings often determine the share price and it’s hard not to see Rolls-Royce going from strength to strength in the coming years.
The business is set to trade at 23 times earnings by 2026, and earnings could rise further on trends that could support demand for a new jet engine and perhaps a new business in small reactors.
Along with the likely increase in European defense spending, following Trump’s election victory, I will continue to be optimistic about the company’s long-term performance. I think it deserves more research.
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