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Another day, another new high for the Rolls-Royce (LSE:RR.) share price. For five years, the actions of the FTSE 100 The aerospace and defense giant has almost doubled in value. Surprisingly, since its lowest point during the pandemic, when the company was on the verge of bankruptcy, the stock has risen over 1,260%!
In May, I was more optimistic than many City analysts. I predicted the Rolls-Royce share price would cross the £5 threshold by the end of the year. In fact, it arrived months ahead of schedule.
So what do the experts say now that the shares are trading at £5.30? Let's explore.
Consensus forecast
Analysts' 12-month price targets for Rolls-Royce shares cover a wide range of predictions. It is worth taking them with a pinch of salt. After all, the stock market often takes even the best-informed City professionals by surprise.
The average price target for Rolls-Royce shares for today is 552.50 pence. Consequently, the consensus of experts is that the share price will grow below 5% from today. If this happens, it will be a notable slowdown compared to recent years.
Zero or hero?
The table below shows how analyst ratings have changed over time.
| Analyst recommendations | October 2023 | September 2024 |
|---|---|---|
| Buy | 4 | 4 |
| Get over | 5 | 10 |
| Hold | 9 | 3 |
| Sell | 0 | 1 |
| strong sale | 0 | 0 |
Berenberg is the most pessimistic among those covering the company. Its analysts have downgraded the stock to a Sell rating with a price target of just 240p. If true, Rolls-Royce's share price could fall by 54% in 12 months. Oh!
The German bank believes pricing will be an issue for Rolls-Royce amid pressure from its low-margin airline business customer base. He also referred to comments made last year by Emirates President Tim Clark about the insufficiency of the Rolls-Royce Trent XWB-97 engines used in Airbus A350-1000 aircraft.
At the other end of the spectrum, bank of america predicts the stock could rise nearly 27%. It has a bullish price target of 675p. Optimistic about Rolls-Royce's growth prospects, flexibility in capital allocation and the return of an investment grade credit rating, the US bank is singing an entirely different tune.
my opinion
So who is right? I've been bullish on Rolls-Royce stock for a while now. I'm glad I was a shareholder for much of the company's impressive turnaround. Looking ahead, I continue to side with the most optimistic experts.
Civil aerospace division margins have advanced from 2.5% in 2022 to 18% today. This places the company in an increasingly stronger competitive position. Profitability growth and cash generation look very strong. I wouldn't be surprised if the company improves its financial targets soon.
Additionally, for the first time in Europe, Rolls-Royce has been chosen as a supplier to build a fleet of mini nuclear reactors in the Czech Republic. It is also closing agreements with the Netherlands and Sweden. Promising things.
It is true that the current valuation poses risks. A price-to-earnings (P/E) ratio of 19.2 and a high Forward P/E of 61.7 leave little room for error. Missed targets or disappointing news can lead to a nasty drop in the stock price, as the stock is not particularly cheap today.
But so far, CEO Tufan Erginbilgiç has not made any missteps. If things continue like this, I see plenty of reasons why the Rolls-Royce share price can continue to rise to 675p and higher.
