2023 has been a great year for Rolls-Royce (LSE: RR.) shares. The aero-engine maker has experienced troubled times in recent years, but after its shares more than doubled in recent months, I wonder if it can continue its impressive rise.
Let’s dig deeper into recent events, future forecasts as well as other factors that could play a part.
Dissecting Rolls-Royce current valuation
The share price has increased by a mammoth 186% over a 12-month period. Trading for 224p as I write, the shares were languishing at 86p a year ago.
Reviewing its price-to-earnings ratio, a multiple of close to 25 makes the shares look overvalued on the surface of things.
However, going through other details with a fine tooth comb, the business trades on a price-to-earnings growth (PEG) ratio of 0.1, making the shares look super cheap. Remember, a reading less than 1 is considered value for money. Plus, analyst forecasts reckon it will remain under 1 for the next two fiscal years, despite huge growth being anticipated. However, I’m wary of reading too much into forecasts as they don’t always come to fruition.
Growth, challenges and future outlook ahead
Rolls-Royce still faces significant headwinds ahead. To start with, it has lots of debt on its books. This is risky as debt is costlier to service when interest rates are high, like now. This strain on its balance sheet could hinder growth aspirations and performance.
Plus, macroeconomic issues including supply chain issues, soaring inflation and the potential for weakened demand in the airline industry due to these issues continuing longer-term, could hurt Rolls-Royce’s performance and shares.
Moving on to the positives then, civil aerospace — the sector Rolls-Royce makes most of its money from — seems to be on the up. This is supported by recent positive updates by a few major airline carriers. In addition to this, defence giant BAE Systems also reported excellent trading recently. This could be good news for Rolls-Royce shares moving forward too. Analysts reckon the business could report close to 400% earnings growth for the current year alone!
Finally, it seems as though a change in leadership has buoyed the business and its shares. Streamlining operations — some of which have been achieved by cutting jobs — seem to be working. The business now has a healthier balance sheet and performance has improved markedly. Should this continue, I don’t see why Rolls-Royce can’t continue its recent impressive ascent.
My verdict
I’m not going to be fooled into thinking Rolls-Royce’s surprising share price rise in recent months could be replicated again. There’s a lot going on with the business as well as externally, which is out of its control.
For Rolls-Royce shares to double from current levels, they’d have to reach levels never seen before! I’m not sure that will happen any time soon. However, there is a good chance that if it continues recent momentum, it could get there at some point. Solid demand in its end markets, combined with recent changes within the business are driving profits and performance. These aspects could boost its shares. I’ll be observing with keen interest!
