I think the Rolls-Royce share price could hit 200p in the next 12 months

Rupert Hargreaves explains why he thinks the company’s turnaround could send the Rolls-Royce share price to 200p in the next 12 months.

| 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.

A young woman sitting on a couch looking at a book in a quiet library space.

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.

The last time the Rolls-Royce (LSE: RR) share price changed hands for 200p was in March 2020. That was just before the coronavirus pandemic shut down the global economy. 

Since then, shares in the group have traded between 140p and 90p although, at one point, the stock dropped below 39p. 

However, I think there is a growing chance shares in the aerospace giant could return to 200p in the next 12 months. There is one particular catalyst I believe could drive a significant re-rating of the stock.

Rolls-Royce share price outlook

In many ways, this company is both a recovery story and a growth play. Of course, the firm needs the civil aviation industry to return to 2019 levels of activity for earnings to recover.

But on the other hand, its presence in the nuclear sector, particularly the small modular reactor market, makes this company an attractive growth stock for the next decade and beyond. 

Thanks to these potential twin catalysts, I think the outlook for the Rolls-Royce share price is looking up. Unfortunately, it is unlikely the stock will return to pre-pandemic levels unless a significant catalyst emerges that pulls investors back to the business. 

I think this is likely to be the company’s cash generation. What I mean by this is that the business has long been promising it will earn a positive cash flow this year.

If it does, it will remove one of the most considerable question marks hanging over the stock since the beginning of the pandemic. Will Rolls run out of money?

When the enterprise is cash-flow positive, it will be able to stand on its own two feet. This will also free up more money for the enterprise to invest in growth initiatives, such as its nuclear business, and chase new customers. 

Something else investors need to consider is the company’s credit rating.

Market sentiment

When an aircraft manufacturer buys an engine from Rolls, it is doing so on the understanding that the engineer will still be around in five or 10 years time. Every unit is sold with a multi-year service contract. This is where the company makes the real money as each engine is sold at cost.

Buyers of the units need to trust that the corporation will be around to meet its obligations. If they doubt its ability to survive, they may postpone orders or seek out another manufacturer. 

This is why the company’s cash position is so fundamentally crucial for the Rolls-Royce share price. If its customers believe the group is struggling to survive, they might stop placing orders. 

Still, there is no guarantee the organisation will meet its cash targets. Further economic disruption could destabilise the organisation’s return to growth. 

I would acquire the company for my portfolio as a speculative play despite this risk factor. Indeed, I estimate that if the corporation hits its cash flow projections, it could earn an annual free cash flow per share of around 10p in the next couple of years.

In 2019, the stock traded at a multiple of around two times free cash flow. A return to this valuation would justify a price of 200p, or more, an increase of nearly 70% from current levels. 

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

How much does an investor need in a Stocks and Shares ISA to earn £1,000 a month in passive income?

A Stocks and Shares ISA's a valuable asset for investors. Not having to pay dividend tax can be a big…

Read more »

Investing Articles

9% dividend yield! Could buying this FTSE 250 stock earn me massive passive income?

Assura looks like an outstanding stock for dividend investors to consider. But is the 9% dividend yield the passive income…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Why I think this month could be critical for the Lloyds share price!

Our writer explains why he thinks the bank's 2024 results will have a significant impact on the short-term direction of…

Read more »

British Pennies on a Pound Note
Investing Articles

This former penny share has soared 168%. Is the best yet to come?

When Christopher Ruane saw a penny share as a potential bargain last year, he was spot on. So having not…

Read more »

Mature couple at the beach
Investing Articles

£20k in an ISA? Here’s how it could generate £1 of passive income every hour — forever

With a long-term approach, Christopher Ruane explains how an investor could aim to earn a pound per hour in passive…

Read more »

One English pound placed on a graph to represent an economic down turn
Investing Articles

FTSE shares: overpriced or still a bargain?

Christopher Ruane reckons a storming FTSE 100 performance of late doesn't tell us much about whether there are still possible…

Read more »

Blue NIO sports car in Oslo showroom
Investing Articles

Would an investor have made money investing £2k in NIO stock 5 years ago?

Our writer looks at how NIO stock has performed over recent years and weighs the bull and bear cases as…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

5 steps to start buying shares with £5 a day

In a handful of steps, our writer explains how someone new to the stock market could start buying shares for…

Read more »