Can Rolls-Royce shares double from here?

Rolls-Royce shares have hit new heights in recent days with the share price exceeding 400p. But could we ever see it trading above 800p?

| More on:

Image source: Rolls-Royce Holdings plc

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.

Rolls-Royce (LSE:RR) shares have more than doubled in value over the past 12 months. The stock has delivered incredible returns for shareholders and is up 188% over the last year. So, with Rolls-Royce trading at 419p at the time of writing (midday, 21 March), could it really double from here? Could we ever expect to see Rolls trading at 838?


Firstly, Rolls has two very attractive features for an investment. It keeps beating market expectations in terms of earnings and the stock has great momentum.

Obviously there’s no guarantee that Rolls will continue beating expectations — it has set a fairly ambitious medium-term targets which will influence market expectations — but it’s a good sign. Equally, momentum, generated by positive investor sentiment, isn’t easy to come by. In fact, UK stocks in general have been suffering from poor investor sentiment. Rolls is an outlier.

Still undervalued

Rolls-Royce still looks undervalued, even after its monumental gains. The stock is currently trading at 23.7 times forward earnings, and that’s around average for its broad peer group of aircraft engine manufacturers, defence contractors, and power systems providers.

For example, General Electric trades at 36.5 times forward earnings, Boeing at 63.3 times, BAE Systems at 20 times, and RTX Corp at 17.4 times. There’s a wide spread here and that reflects the fact that all of these business are different and the same goes for their growth rates.

Rolls is certainly among the most attractive here based on its middling price-to-earnings (P/E) ratio, its very strong growth rate, and it’s impressive economic moat. Below I’ve highlighted the P/E ratios for the next four years, however the most relevant comparison is probably with GE and RTX, which owns P&W. Of course, a more in-depth comparison would need to look at debt and other factors.

P/E Year 123.72063.636.517.4
P/E Year 219.6242915.5
P/E Year 320.517.323.913.9
P/E Year 417.113.421.114.4
All figures are forecasted earnings

In answering our question, there’s no precedent for Rolls-Royce to be trading at double its current share price. However, that’s not to say that Rolls couldn’t trade twice as high in four or five years time, assuming the growth proposition is as strong then as it is today.

The bottom line

Rolls-Royce is currently experiencing tailwinds in all parts of it business. With the company refocusing its attention on margin as well, Rolls is an incredibly attractive proposition at this moment.

Looking further ahead, there are obvious positive trends in civil aerospace where the industry will need an estimated 80,000-90,000 engines for new aircraft alone over the next two decades.

One potential risk here is that Rolls left the narrow-body market in 2011. It stands to miss out on 80% of demand if it doesn’t re-enter this space.

So, can Rolls-Royce shares double from here? In the current growth trajectory is sustained through the medium term, then absolutely. However, there’s really very little certainty when we’re looking that far ahead.

Nonetheless, it’s current price-to-earnings-to-growth ratio suggests it could trade 30% higher.

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 positions in Rolls-Royce Plc. The Motley Fool UK has recommended BAE Systems and Rolls-Royce Plc. 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

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

Investing freedom — but inside a pension

Strapped consumers might be cutting back on investing, but they’re still keeping up their pension contributions. The only problem? A…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Forget gold! I’d rather buy these 3 FTSE high-yielders in a Stocks and Shares ISA

Gold looks like a risky investment to me as the price hits an all-time high. I'm ignoring the fuss to…

Read more »

Young female business analyst looking at a graph chart while working from home
Growth Shares

This 55p UK stock could rise more than 300%, according to a City broker

This UK stock has fallen from above 800p to below 60p. But analysts at Citi believe it’s capable of a…

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

I think this FTSE 250 trust has all the right ingredients to lock in long-term profits

Today I'm examining the prospects of a private equity investment trust on the FTSE 250 that caught my attention recently…

Read more »

Young black man looking at phone while on the London Overground
Investing Articles

2 under-the-radar UK shares investors should consider snapping up

Two UK shares have caught the eye of our writer. She explains why investors should be taking a closer look…

Read more »

Investing Articles

Are these 2 ultra-high-yielding income stocks a good buy for me?

These two income stocks often split the debate amongst investors. So what does our writer think of them as potential…

Read more »

Senior woman potting plant in garden at home
Investing Articles

5% yield! This dividend stock could be great for my retirement

Our writer explains why this dividend stock appeals to her as she’s investing to build wealth to enjoy in the…

Read more »

A young Asian woman holding up her index finger
Investing Articles

I’d aim for a second income of £1,000 a month with this super-reliable dividend stock

I think a great way to build a second income stream is by investing in dividend stocks via a Stocks…

Read more »