Image source: Rolls-Royce plc
Like the 12 months that preceded it, 2024 was an excellent year for Rolls-Royce (LSE: RR). While Rolls-Royce shares did not perform the best in the FTSE 100 index, as they had been the year before, were still in great shape.
Over the past year, the aeronautical engineer's share price has soared 94%.
Looking back five years, the company's existential crisis during the pandemic era seems long gone. Rolls is now 165% higher than it was at this time in January 2020. That was before the pandemic started making the city nervous.
So, after almost doubling over the past year, could Rolls-Royce's share price do the same again in the next 12 months? Or could it be cut in half, approaching the level it was a year ago?
The duplication scenario
At first glance, the prospect of the stock doubling seems far-fetched. After all, this is a mature company in a mature industry that has already exploded in recent years. I, for one, would be surprised if this happened next year, although that means it can't be that way.
However, there are arguments in favor of this scenario.
The current price-to-earnings (P/E) ratio is 22. That doesn't look cheap to me. On the other hand, it is substantially cheaper than other engine makers, such as its New York-listed peers. GE Aerospace (seated at 33) or owner of Pratt and Whitney RTX (36).
Part of that disparity can be explained by the generally lower valuations in the London market currently, compared to its US peers. Still, Rolls could rise substantially (though not double) without being more expensive on a price-to-earnings basis than its key rivals.
There is another possible lever for a big rise in Rolls-Royce's share price and that is better earnings.
In that case, even maintaining the current P/E ratio, let alone a higher one, would imply a higher price. Both core and underlying earnings per share showed a marked increase in 2023 compared to the previous year.
Last year's annual results should be published next month. They will include details on how the engineer is progressing against his ambitious medium-term financial goals.
If the company makes further significant improvements to its earnings, I think that could help push the stock higher.
The Halving Scenario
I doubt those results will disappoint significantly, or we probably would have gotten a profit warning before now.
But one thing that could driving the stock price down is if the company indicates that it appears unlikely to meet its self-imposed targets in the coming years. He's been an inconsistent performer for decades, so I view him as a credible risk.
One of the challenges of trying to increase profits is that, after initial cost cuts (which themselves pose reputational risks in a safety-critical industry), raising sales prices can lead customers to shop around. more prices.
A key risk that I think could lead to the stock halving is a sudden external shock that causes a dramatic slowdown in civil aviation demand. That's why I won't invest at today's price.
The pandemic was one example, but that shock could also be a volcanic eruption that causes grounded flights or a terrorist attack.
