Image source: Rolls-Royce Holdings plc
He Rolls Royce The (LSE:RR) share price had an excellent 2023, rising by over 200%. This made it the best performing company in the world. FTSE 100 Index companies.
Now, you might expect this year's performance to be more modest after such a run, but modest seems to be an alien word for its stock.
Six months later, they have already soared by 55%. This easily outpaces the Footsie, which is up a modest 7%.
Extending our time horizon to October 2022, Rolls-Royce shares were trading at 70p. At the time of writing, 5 July, they were trading at 461p, representing a return of 563%.
Imagine being a shareholder in the company during that run! If you had invested £10,000 at the time, you would have £56,300 today. But I'm not going to dwell too much on this missed opportunity. Instead, as a forward-looking investor, I want to predict where the share price will be at the end of the year.
The case of the bull
Under the leadership of its current CEO, Tufan Erginbilgiç, who took over at the start of 2023, Rolls-Royce has staged an impressive recovery.
Looking at the 2023 financial year results, both revenue and profit grew at a strong pace. Revenue increased from £12.7 billion to £15.4 billion. Profit after tax also accelerated by 620%, from £158 million to £1,142 million.
Seeing a company improve its operating margins shows us that management is managing it well. Therefore, this increase from 5.1% to 10.3% is positive.
Another point to note is that its net debt fell from £3.3 billion to £2 billion by the end of 2023.
The company is also forecasting strong growth in the medium term (with a time horizon of 2027). What I am excited about is that the operating margin is expected to improve further to 13%-15%. The civil aerospace division, the company’s largest revenue source, is expected to operate at a margin of 15%-17%. This is also the fastest growing division, so it is good to see that it will also be the most profitable.
The case of the bear
The above sounds good and nice, but it is not that simple.
First, Rolls-Royce shares are quite expensive. Its price-to-earnings (P/E) ratio of 30 is more than double the Footsie average.
Secondly, its greatest strength can also be seen as its greatest vulnerability. Sales of civil aviation engines are highly dependent on the broader economy, which is outside the company’s control. If people’s finances are affected, they may be less likely to take vacations. Or if another pandemic hits, travel will be restricted. These scenarios can hamper demand for flights.
Third, after such a large increase in the price of their shares, those who have invested in them for a while may withdraw some profits, which could put downward pressure on their share price.
Verdict
Overall, I think Rolls-Royce shares are already perfectly priced. I don't think the share price will go much higher by the end of the year and I think it will be around 460p.
However, that doesn't mean it's still a great company. If I had to think about a longer time horizon than the next six months, I would consider buying its shares because of the strong growth it's showing.
