I’ve written extensively about the Rolls-Royce Holdings (LSE:RR) share price over the course of 2020. I was pessimistic about the stock for some time, but I turned positive on the outlook a few months ago. There were several reasons for this.
Firstly, I felt the share was oversold by investors, to such an extent that the price didn’t accurately reflect the intrinsic value of the net assets. Added to this was the thought of a better 2021 thanks to the vaccine progress and early signs of an increase in bookings from commercial airlines. So what does this mean for the Rolls-Royce share price as we head into next year?
My 2021 Rolls-Royce share price forecast
The current share price sits above 100p, but is still four times off the highs seen back in 2014. The world is a different place now, and I accept that. Yet my share price forecast for Rolls-Royce for the end of 2021 sits higher than the current price. My forecast price is 210p, with a stretch target of 260p. The initial target marks a big move back towards the early 2020 pre-Covid level of 240p.
Even though I’m positive on the outlook for the business, I’m not 100% certain it can exceed 2019 levels within the next year. There’s just too much to do, and too much that has happened this year, to realistically see the Rolls-Royce share price shooting back to levels of 300p+. Even Boeing CEO Dave Calhoun said earlier this year that he thinks it could take two or three years for air travel to recover.
Specific reasoning
Throwing a number out there is fine, but what are my facts backing it up? One reason my forecast is higher than the current price is due to the vaccine rollout. Over half a million jabs have already been given. NHS England expects the bulk of patients at risk to have been vaccinated by March/April of next year.
I know these aren’t Rolls-Royce customers, but it’s more about investor sentiment than actual jab numbers. If investors feel comfortable that the vaccine rollout is going well, it should cause the Rolls-Royce share price to rally on the prospects for a return to normality. It shouldn’t have to close any factories for an extended period as it benefits from increased flying hours, and is able to fully carry out maintenance requirements.
Another reason why I think the Rolls-Royce share price could move higher next year is due to its internal finances. The management team has focused on accessing liquidity and also keeping an eye on costs. This will benefit the business into 2021. For example, a recent share issue and bond issuance raised over £2bn. Cost-cutting is expected to have saved £1bn by the end of this year. The firm can’t control demand, but it’s ensuring that elements of the business within management control are being looked after properly.
I’ll have to wait for a year to see if my forecast has been correct. And it may take longer than a year for a bounce-back. But what I feel strongly is that the direction of the move (irrespective of magnitude) will be upwards for the Rolls-Royce share price.
