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The Rolls-Royce share price is expected to rise by up to 30%!

The Rolls-Royce share price is expected to rise by up to 30%!
The Rolls-Royce share price is expected to rise by up to 30%!

Image source: Rolls-Royce plc

Image source: Rolls-Royce plc

It is Tuesday (July 9) and as I write this, Rolls-Royce (LSE: RR.) The share price is £4.61. A 12-month price target for the stock is for a rise of up to £6, representing a premium of 30.2%.

After the impressive performance of the last few years, this does not seem too ambitious. The stock has risen by 54.46% this year. In the last 12 months, it has risen by 211.9%.

It has been one of the best performing stocks in Europe over the past 18 months. Rolls was close to bankruptcy in 2020, but has come a long way since then.

But could the price increase by 30% next year? That’s the question I want to answer here.

The momentum on his side

To get to the bottom of this, I will examine a few factors. The first is the stock’s momentum.

I want to make it clear that I would never buy shares in a company just because its price is going up. But I can understand why the stock has risen so much recently. The company has many positive aspects.

As I mentioned above, Rolls-Royce has overcome its difficulties and started a turnaround. In the first months of this year, engine flight hours returned to pre-pandemic levels. In the coming months, they may even surpass those levels. In addition, Rolls-Royce has increased its profits, increased free cash flow and reduced its debt.

The company is targeting an operating profit of up to £2.8 billion by 2027. Given this, I can understand why Rolls-Royce is so excited.

Evaluation

But I think there is one major stumbling block. And that is the stock’s valuation. It currently has a price-to-earnings ratio (P/E) of 16.1. That’s not bad. However, as the chart below shows, the P/E is just over 31.

This seems expensive to me and suggests that Rolls may be overvalued. It is also much more expensive than its rival BAE Systemswhich has a P/E ratio of almost 17.8.

Created with TradingView

The same is true for the price-to-sales ratio. As the chart below shows, it has been increasing over the past year. The current price-to-sales ratio of almost 2.4 is also higher than that of BAE Systems at about 1.7.

Created with TradingView

Given this background, is there a risk that investors have pushed the stock too far? I think so. Buying stocks to make money quickly is not my strategy. I want to build a stable fortune in the long term.

A huge leap?

No one really knows how Rolls shares will perform over the next 12 months, but if I had to guess, I wouldn’t think it will rise 30%.

Given the high valuation, I even expect the share price to decline.

After the rapid rise, it was inevitable that the stock would fall again. We have seen small signs of this recently. For example, the Rolls share price has barely moved in the last month, falling by less than 1%.

While the company’s future goals are ambitious, I think the share price could decline at the first sign of slowing growth. If that happens, I will look to add the company to my portfolio.

The post “Rolls-Royce share price expected to rise by as much as 30%!” first appeared on The Motley Fool UK.

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Charlie Keough does not own any of the stocks mentioned. The Motley Fool UK has recommended BAE Systems and Rolls-Royce Plc. The views expressed on companies mentioned in this article are those of the author and may therefore differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2024

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