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Another day, another fresh high for the Rolls-Royce (LSE:RR.) share price. Over five years, shares in the FTSE 100 aerospace and defence giant have almost doubled in value. Remarkably, since its pandemic low when the company nearly went bankrupt, the stock’s climbed over 1,260%!
Back 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 got there months ahead of schedule.
So what are the experts saying now with the stock trading at £5.30? Let’s explore.
Consensus forecast
Analysts’ 12-month price targets for Rolls-Royce shares cover a huge range of predictions. It’s worth taking them with a pinch of salt. After all, the stock market often takes even the most well-informed City professionals by surprise.
Today’s median share price target for Rolls-Royce is 552.50p. Accordingly, the expert consensus is for share price growth below 5% from today. If this happens, it’ll be a remarkable slowdown compared to recent years.
Zero or hero?
The table below shows how analysts’ ratings have changed over time.
| Analyst recommendations | October 2023 | September 2024 |
|---|---|---|
| Buy | 4 | 4 |
| Outperform | 5 | 10 |
| Hold | 9 | 3 |
| Sell | 0 | 1 |
| Strong sell | 0 | 0 |
Berenberg’s 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, the Rolls-Royce share price could plummet 54% in 12 months. Ouch!
The German bank believes pricing will be an issue for Rolls-Royce amid pressure from its customer base of low-margin airline businesses. It has also referenced comments made last year by Emirates president Tim Clark about the inadequacy of the Rolls-Royce Trent XWB-97 engines used for Airbus A350-1000 planes.
At the other end of the spectrum, Bank of America predicts the shares could rise almost 27%. It has a bullish price target of 675p. Optimistic about Rolls-Royce’s growth prospects, capital allocation flexibility, and the return of an investment-grade credit rating, the US bank’s singing a completely different tune.
My take
So who’s right? I’ve been bullish on Rolls-Royce shares for a while now. I’m glad to have been a shareholder throughout much of the firm’s impressive recovery. Looking ahead, I’m still siding with the more optimistic experts.
Margins for the civil aerospace division have advanced from 2.5% in 2022 to 18% today. This puts the firm in an increasingly strong competitive position. Profitability’s rising and cash generation looks very robust. I wouldn’t be surprised if the company upgraded its financial targets soon.
Plus, in a European first, Rolls-Royce has been chosen as the supplier to build a fleet of mini nuclear reactors in Czechia. It’s also closing in on deals with the Netherlands and Sweden. Promising stuff.
Granted, today’s valuation poses risks. A price-to-earnings (P/E) ratio of 19.2 and a lofty forward P/E of 61.7 leaves scant room for error. Missed targets or disappointing news might trigger a nasty share price drop since the shares aren’t particularly cheap today.
But so far, CEO Tufan Erginbilgiç’s hardly put a foot wrong. If things continue like this, I see plenty of reasons the Rolls-Royce share price can keep rising to 675p and beyond.
