The ascent of Rolls-Royce’s (LSE:RR) share price from the depths of the pandemic has been breathtaking. Having collapsed below 40p in autumn 2020, the FTSE 100 company now looks a very different prospect and trades at around 295p.
The engineer’s rise from the flames isn’t just down to the spectacular recovery in the global travel industry, though. This has supercharged demand for Rolls’ aftermarket services as planes have taken to the air en masse.
It’s also because of the impressive early gains from chief executive Tufan Erginbilgic’s ambitious turnaround plan.
Up, up and away
City analysts believe the share price has much further room to grow too. Today Rolls has an average 12-month share price target of 341p per share. That’s based on predictions from 18 analysts who have rated the stock.
And the most bullish of these brokers reckon the company’s shares will hit 431p over the next year. That represents a 46% premium from current levels.
So should I buy Rolls shares in anticipation of further chunky price gains?
Slower growth
While current price targets aren’t to be sniffed at, they suggest that the share price momentum Rolls has recently enjoyed will cool down. In the last 12 months the firm has risen a breathtaking 175% in value.
This is perhaps understandable given the market buzz around the FTSE 100 company’s recovery. Such a breakneck rise is rarely sustainable.
Share price gains are also tipped to slow as consumer appetite for international travel normalises. A subsequent fall in flying hours would hamper revenues growth at Rolls’ Civil Aerospace division.
Possible turbulence
However, as a potential investor I’m concerned that the travel industry could cool much more sharply than analysts expect, pulling Rolls’ shares significantly lower.
This is not only due to potentially waning wanderlust following the end of Covid-19 lockdowns.The tough economic landscape could cause people to scale back their travel plans.
In a sign of rising stress, Delta Air Lines — the world’s biggest airline based on revenues — has in recent days slashed its earnings guidance for 2024 on a worsening outlook. Chief executive Ed Bastian explained that the decision was based on “a bunch of macros“.
Delta may not be the last to downgrade its forecasts. Not only are economic conditions becoming more difficult. The geopolitical landscape (which Bastian described as “testy“) is also deteriorating, and further route cancellations could be possible as the Middle East crisis intensifies.
Too expensive
It isn’t all gloomy for Rolls shares, of course. For one, demand for its defence products remains rock solid as arms budgets steadily rise. And as I mentioned earlier, the early stages of the company’s restructuring drive is also very encouraging.
But that potential downturn in the travel industry — along with ongoing supply chain problems in the aerospace industry — make Rolls shares a risk too far right now for me. And especially as the company now trades on a forward price-to-earnings (P/E) ratio of 23.7 times.
This sort of expensive valuation leaves the shares at risk of a correction if news flow does indeed worsen. All things considered, I’d rather look for other FTSE 100 stocks to buy.
