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He Rolls-Royce holdings (LSE: RR.) The share price hit a 52-week high of 435p on April 2, up 45% so far this year.
And that meant it had more than quadrupled in just two years.
But since that peak, Rolls shares have fallen 9%, to 396p at the time of writing on April 19. Is this the beginning of a price correction?
Wobble
There is probably some profit taking here. This usually happens with growth or recovery stocks. Investors will look at their earnings and simply take away a little bit of the edge.
Someone who invested £1,000 in Rolls-Royce shares at the bottom could withdraw that amount now… and still have around £3,000 left. It's like free shares.
Now, I'm not going to shout that the sky is falling. Even if Rolls stock fell a bit, I still think we might be considering a long-term buy.
But I say it's worth sitting back and looking at where valuation could go at different price levels.
Valuation
Here's a table showing projected valuations for Rolls-Royce, at different price points. I look at the high price of 435p, the recent 396p, and then the 5%, 10% and 20% drops from today.
And so as not to sound totally bitter, I check out what a 20% price increase could do. (We don't need to see a 10% increase as that would simply take us back to 435p.)
So here's what the projected price-to-earnings (P/E) ratio and dividend yield (DY) could look like:
Share price | P/E 2024 | P/E 2025 | P/E 2026 | Year 2024 | Year 2025 | Year 2026 |
435p (peak) | 29.2 | 24.9 | 21.8 | 0.63% | 0.99% | 1.51% |
396p (recent) | 26.6 | 22.7 | 19.9 | 0.69% | 1.09% | 1.66% |
376p (-5%) | 25.2 | 21.5 | 18.9 | 0.72% | 1.15% | 1.75% |
356p (-10%) | 23.9 | 20.4 | 17.9 | 0.76% | 1.21% | 1.85% |
317p (-20%) | 21.3 | 18.2 | 15.9 | 0.86% | 1.36% | 2.08% |
475p (+20%) | 31.9 | 27.2 | 23.8 | 0.57% | 0.91% | 1.39% |
20% drop?
That's a wide range of assessments. And even a 20% drop in the share price from current levels would leave Rolls-Royce with a P/E of 21.3 for 2024.
That's about 40% above the long term. FTSE 100 average, so the stock could still look expensive. But for a stock with long-term earnings growth potential, it could be very cheap.
And optimistic forecasts could lower the P/E to 15.9 by 2026. For a high-quality growth stock like Rolls-Royce Holdings, I think that could be a bargain.
A 20% increase?
At the other extreme, a 20% increase in the share price from today could give us a P/E of 31.9 for this year, falling to 23.8 in 2026.
And I think you could argue that even that is a good value for a stock with the prospects that Rolls has.
All the time, no matter what happens to the share price, it seems like the dividend is just getting started. And those returns would be heavily covered by expected earnings.
A fall?
Whatever happens in the next 12 months, I don't think the share price justifies a big drop. But if we get one, it could be a good buying opportunity.