Could the Rolls-Royce share price hit £3 before Christmas?

Dr James Fox takes a closer look at the Rolls-Royce share price with the stock already climbing 160% over the past 12 months.

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Image source: Rolls-Royce plc

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The Rolls-Royce (LSE:RR) share price has performed better than almost anybody could have imagined a year ago. The company registered earnings beat after earnings beat, and even now, it still looks cheap according to several metrics.

So, could the Rolls-Royce share price hit £3 before Christmas?

Still some distance to go

At the time of writing, Rolls-Royce shares are changing hands for £2.43. That’s up from around 60p 14 months ago. However, £3 would still represent a 23% increase on the current position. There’s still some distance to go, and there’s only only 27 market days until Christmas.

Nonetheless, Rolls-Royce certainly has momentum of its side, with the stock up 5.7% in a week, 12.1% in a month, 17% in three months, and 53% in six months. Moreover, the company is hosting a Capital Markets Day on 28 November. This could be a catalyst for further growth, with management set to define its objectives for the future.

It’s not expensive yet

One of the most surprising things is that Rolls-Royce shares still trade in line with their peers, and even look cheap by some metrics.

On a price-to-earnings basis, Rolls looks pretty expensive for the current financial year, trading at 33.8 times earnings.

EPS forecast (p)7.179.9513.01
P/E at current share price33.7524.418.7

This is more expensive than some of its peers, especially those in civil aviation. However, the above table shows that Rolls-Royce is expecting to see its earnings grow considerably through to 2025.

As such, it’s clear that investors are willing to pay a premium today for Rolls’s growth throughout the medium term.

Growth is also forecast to continue throughout the medium term, resulting in a PEG ratio of 0.47. A PEG ratio below one suggests a company could be undervalued.

Here’s how Rolls compares with industry peers from civil aviation and defence.

BAE Systems2.65
RTX Corp1.61

Buying the trend

Sometimes it can be risky buying stocks that have already surged. It may feel like the support level is a long way back.

However, on this occasion, it appears that the data supports the notion that Rolls-Royce represents good value compared to its peers.

Of course, there’s an issue using the PEG ratio as basis for my investments. That’s because we’re using forecasted earnings to create the valuation.

Nonetheless, this data can also be supplemented by industry forecasts. Analysts have been keen to point out that the civil aviation sector is expected to surge over the next two decades, with more than 40,000 new aircraft to be delivered.

In turn, this represents a huge growth opportunity for Rolls, especially if it can re-enter the narrow-body market — where 80% of the demand is expected to be. The UK engineering giant stopped building engines for narrow-body jets a decade ago.

Bar another pandemic, or surging aviation fuel prices, Rolls could continue to beat expectations and outperform the market. But without any earnings data before Christmas, it may not hit the £3 market until 2024.

Finally, I should note that having doubled my money on this stock, I sold my holdings. As an investor with a long-time mindset, I now recognise I should have stayed invested. I’m contemplating buying again.

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.

James Fox has no position in any of the shares mentioned. The Motley Fool UK has recommended BAE Systems. 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.

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