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He Rolls-Royce Holdings (LSE: RR.) The share price has almost doubled in 2024, capping a remarkable recovery from the depths of the 2020 stock market crash.
What's behind this spectacular year? And can Rolls stock repeat the feat in 2025?
Debt, what debt?
I would say the real key to Rolls-Royce's resurgence is debt. Or rather, the way it has been disappearing.
Debt nearly paralyzed the company in the worst days of the pandemic. Net debt reached more than £5 billion at the end of 2021.
However, at the time of its 2024 interim results in August, the company said: “Net debt was reduced to £800m driven by statutory net cash flow from operating activities of £1.7bn.“
What's more, brokers' forecasts place Rolls even in a net cash position at the end of the year.
Rolls-Royce receives the award for the best result of the year on its balance sheet. No, of the century.
New management
Without a doubt, the drive and enthusiasm of the not-so-new boss Tufan Erginbilgic has given some encouragement to Rolls-Royce's steps. In the November trading update, he said: “Our transformation of Rolls-Royce into a high-performance, competitive, resilient and growing business continues with pace and intensity. … “We still need and want to do more as we expand Rolls-Royce’s earnings and cash potential.”
Now, I know that CEOs of companies tend to talk things out. But this one has put his money where his mouth is. Or rather, in the pockets of the shareholders.
I quote it here in part as an example of how it has been inspiring the amazing change we have seen. But also as a precaution.
Beware of a slip
There's something I've seen happen many times with very optimistic business sentiment. A company sets ambitious goals and meets them regularly. In fact, it exceeds expectations time and time again. And the company's management is understandably openly enthusiastic.
But exceeding expectations, not simply meeting them, can become the expectation rather than the exception.
What if one day a series of results fail to meet the high hopes of the biggest bullish investors? We often see selling and the stock price falling.
So what makes me most nervous about Rolls-Royce's share price outlook for 2025 is exactly that. Perhaps in one quarter the company will obtain very acceptable results, although not noticeably better than expected.
In fact, I think that's inevitable. No company I know has been able to always exceed expectations.
Forecasts and valuation
I prefer that management promise less and deliver more, and not run the risk of falling into the opposite.
Still, even taking this into account, the forecasts actually make Rolls-Royce's stock valuation look reasonable to me.
We're looking at a pretty high forecast price-to-earnings (P/E) ratio of 32 for the full year. But if earnings continue to grow as projected, they could fall to 25 by 2026. And depending on how the next few years play out, that could be attractive.
For me? I don't buy high value growth stocks these days. But if I still did it, I'd be scratching my head over this.
