What could the Rolls-Royce share price be worth in five years?

Rupert Hargreaves explains why he thinks the Rolls-Royce share price could be worth significantly more in five years time than it is today.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

pensive bearded business man sitting on chair looking out of the window

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Whenever I have covered the Rolls-Royce (LSE: RR) share price over the past few months, I have always highlighted that it could take years for the company to recover to 2019 levels of activity and profitability. This is a projection based on analysis by aviation experts. Their projections suggest the global aviation industry will not recover until 2023 at the earliest.

As Rolls’ largest and most profitable division is its civil aviation business, the company’s fortunes are, to a certain extent, closely linked to those of the aviation industry. Unfortunately, even though analysts predict a recovery by 2023, it could be several more years before the industry is confident enough to start placing orders for significant aircraft deliveries. Until these orders are in the pipeline, Rolls-Royce may continue to suffer. 

Still, as I have noted before, the group has other strings to its bow. Its defence division is a steady revenue generator. Meanwhile, the nuclear business could become a significant profit centre over the next decade. 

Considering all of these factors, I have been wondering how much the Rolls-Royce share price could be worth in five years.

Of course, it is difficult to predict the outlook for any company accurately, especially in such an uncertain environment. Nevertheless, by using what we know so far, I think it could be possible to place a ballpark figure on what the corporation could be worth in the best-case scenario.

Rolls-Royce share price valuation 

Due to the nature of the company’s business, valuing Rolls-Royce on profitability alone is quite challenging. The organisation has only earned a net profit in two of the last six years. However, between 2015 and 2019, the group reported positive free cash flow. So, that is the metric I will use to value the stock. 

In 2018 and 2019, the company generated an average annual free cash flow from operations of £800m. This was worth roughly 14.1p per share per annum. Based on the stock’s past trading history, it seems as if the market was willing to pay around 20 times free cash flow per share before 2020. 

Rolls’ management reckons the company can produce £750m of free cash flow in 2022, although some analysts have been questioning whether or not this is possible. A more realistic target might be 2023 or 2024, which would correspond with aviation experts’ projections for the sector’s recovery. 

Assuming the firm hits this forecast, and after taking into account the new shares issued last year to reinforce its balance sheet, I think the company has the potential to generate 11p per share in free cash flow within the next five years. A multiple of 20 times this figure suggests a price target of 220p within the next five years. 

Risks ahead 

These are just projections at this stage. Plenty could go wrong between now and 2024, which may force management to reconfigure cash flow projections. There is also no guarantee the aviation industry will ever recover to 2019 levels. 

Still, I think these numbers provide an interesting guide on how much the stock could be worth. That is why I would be happy to look past the company’s short-term headwinds and buy a speculative position for my portfolio. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may 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.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »