The UK’s largest bank has recently revised its forecast for the value of Rolls-Royce

Rolls-Royce (LSE:RR) has been a top performer for FTSE 100 in 2024. Last year, the price of Rolls-Royce fell by 129%. Various banking and consumer research groups have rushed to raise the company’s valuations in recent months. However, another group posted an interesting weather forecast that caught my eye.

An analyst’s view

Last week, a team of researchers at Barclays led by Milene Kerner revised its 12-month share price for Rolls-Royce. Set it to 540p. In context, the stock opened this week at 546p, so this is a clear message to me that the Barclays team do not see any gains in the stock next year.

I think a more detailed research report will come out soon, explaining the reasons for this price target.

Of the 21 broad analysts covering the stock, the consensus price target is 570p. So it is clear that Barclays is below average. However, it is a major UK bank with a respected research department, so I take their opinion seriously.

As a disclaimer, price targets from experts should not be taken as fact. It’s just an opinion, but given the technology in this industry, it’s always a factor I consider when thinking about buying a stock.

Why the prediction can be correct

One of the reasons why the share price could reach 540p is because the stock is becoming overvalued. Even at current levels, the price-to-earnings ratio is just under 40! This is about four times the number I use to give a fair value.

The stock is on a high, having grown 539% over the past two years. I accept that in the last two years the company has been undervalued, but I struggle to see how it appeals to a new investor like me.

I have seen it many times in the past when a company has embarked on a transformation (as Rolls-Royce has done) and achieved incredible efficiencies. However after a few years, it becomes difficult to make the same kind of progress, as most of the obvious repairs have been made. Therefore, I think that the biggest movement in the stock price from the conversion has already happened, with limited future gains.

Avoiding FOMO

Of course, I wish I had jumped on the bandwagon and bought the stock a year ago. But it’s getting to the point where I feel like I’m just going to buy now out of FOMO (fear of missing out). It’s never a good reason to buy a stock.

It’s true that Barclays could be wrong, with the share price heading to 600p and beyond by 2025. To see this, I think the annual results released early next year will need to exceed expectations. In addition, if supply chain problems reach next year, this can greatly improve production speed and lower costs further.

I’ll sit on my hands for now, but I’d be happy to buy the dip if the share price goes down.