Rolls-Royce (LSE: RR.) shares just can’t stop rising at the moment. Over the last six months, they’ve climbed from around 200p to 330p.
Could they hit 500p in 2024? Let’s discuss.
Why the shares are flying
The main factor driving the Rolls-Royce share price higher right now, in my view, is bullish broker activity.
Since the company advised in November that it’s aiming to deliver £2.8bn in medium-term operating profit, a number of brokerage firms have upgraded their earnings forecasts and/or price targets.
For example, in early December, analysts at JP Morgan raised their target price to 400p from 235p, while also lifting their rating on the stock to ‘overweight’ from ‘neutral’.
“We now believe a much higher percentage of Rolls-Royce’s long-term service agreements will convert into profit“, they said at the time.
Around the same time, Goldman Sachs reinstated coverage of the stock with a ‘buy’ rating and a 370p price target, saying the company is still in the early innings of an inflection in earnings and cash flow.
“Investors are questioning whether expectations are too high. We do not think so”, wrote its analysts.
Meanwhile, a week or so later, Citi upgraded its earnings forecasts and raised its target price to 431p from 294p, saying that Rolls-Royce’s targets are credible.
This kind of broker activity tends to have a positive impact on a company’s share price as it gives investors confidence to buy shares.
Is £5 possible?
As for whether the shares can hit £5 in 2024, I think a lot is likely to depend on the forward-looking earnings guidance we receive from the company in its full-year results tomorrow (22 February) and its interim results in August, and the subsequent broker activity.
As it stands, brokers expect Rolls-Royce to generate earnings per share (EPS) of 12.6p for 2024. So a share price of 500p would equate to a price-to-earnings (P/E) ratio of about 40. That seems like a stretch to me.
However, if the company was to produce better-than-expected profit guidance tomorrow and/or in August, and brokers raised their earnings forecasts and share price targets again, I wouldn’t rule out a share price of £5 in 2024.
For example, if FY2024 EPS forecasts rose by 25% over the course of the year to 15.75p, the P/E ratio needed for the shares to hit 500p would only be 32. That’s still a very high multiple. But it’s not out of the question for this stock, to my mind.
My call
Personally, I don’t think Rolls-Royce shares will hit the £5 level this year. To hit that price, they would have to rise another 50% or so in a relatively short period of time.
But stranger things have happened in the stock market. And with the shares in a strong uptrend, there is a chance that they could hit that level in 2024.
