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I Rolls-Royce (LSE: RR)’s share price sometimes feels like it’s losing momentum, troubled by its relentless rise. It’s down 5.5% in the past month, for example.
However, procrastination is still the best FTSE 100 shares in one year (+121%), two years (+491%), and three years (+274%). These are jaw-dropping returns.
But what could be next for this amazing producer? However, one City analyst thinks it will rise 22% to 655p in the next 12 months.
A a smorgasbord of ideas
Commentator is David Perry who appears JP Morgan which earlier this month maintained a buy rating on the stock. He also increased his price, from 535p to 655p.
This is among the highest targets, although there is a wide range of estimates. The highest is 701p (+30%) and the lowest is 240p (-55%). Both cannot be right, so it is better to take these predictions with a grain of salt.
Overall, the consensus price target among analysts is 573p, which is about 7% above the current level.
As a Rolls shareholder, I would like to see the stock rise 22% to 655p. However, there were a few caveats in the latest trading update that I can’t ignore.
Supply chain headaches
On November 7, the engine maker gave us an update on its year to date. The main thing I always have is the number of engine flight hours in the 10 months to the end of October. It was just 2% above the level achieved before the pandemic threw the world – and Rolls-Royce’s business – into chaos.
The company’s full-year guidance is 100-110% above 2019 levels. It sticks to this, but 102% is tracking towards the lower end of this direction.
This metric is important because Rolls’ key Civil Aerospace division earns a large portion of its revenue from maintenance, repair, and overhaul. This is directly related to the number of hours its engines run.
However, the aerospace sector suffers from a shortage of parts, labor and new aircraft. Engine production and maintenance schedules are therefore affected.
To give one example, Thai Airways CEO Chai Eamsiri recently told Reuters working for Rolls-Royce engines in it Boeing 787 flights now take six months instead of three.
Rolls-Royce is doing well to navigate these supply chain challenges, but they remain a major threat to the company’s continued growth.
What I do
The stock trades at about 30 times its expected earnings in 2024 iShares Global Aerospace & Defense UCITS ETF as a representative of the industry, Rolls-Royce seems to be the perfect value. The price-to-earnings ratio of the ETF is 29.2.
As things stand, I’m not ready to buy any more shares, but I’m happy to hold onto the ones I have. That’s because demand for long-haul aircraft (and therefore engines) is expected to grow over the next two decades, driven by increased global travel, particularly in Asia.
Meanwhile, its defense force must grow as nations strengthen their forces in our geographically fragmented political world. The company’s engines power submarines and military jets.
Finally, there is Rolls-Royce’s small modular reactor business, which was recently selected as the preferred supplier of the Czech Republic for its mini-nuclear reactor system. This emerging sector could be worth $72bn by 2033 and $295bn by 2043.
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