Few shares have been able to execute a stellar comeback like Rolls-Royce (LSE:RR.) has over the last 12 months. Under new leadership, the firm’s undergone a massive overhaul, with a complete corporate restructuring.
This has included the unfortunate axing of thousands of employees as well as the disposal of entire segments of the business. But what’s emerged from this chaos is a far nimbler enterprise that’s finally getting its debt under control.
With the narrative surrounding the engineering giant shifting drastically, analyst forecasts have become increasingly bullish. And now some are predicting the stock to rise to as high as 520p within the next 12 months. Compared to the current valuation of around 400p, that presents a potential 30% return – roughly three times the stock market average.
Needless to say, if these forecasts prove accurate, that would make Rolls-Royce shares among the best to consider buying now. So how realistic are these expectations? And what factors could prevent Rolls-Royce from surpassing the £5 threshold for the first time as a publicly-traded company?
The surging share price
Over the last 12 months, the stock price has almost tripled. After raising billions of pounds through disposals, new CEO Tufan Erginbilgiç has used this capital to eliminate a large chunk of the group’s outstanding liabilities. The subsequent elimination of unnecessary employees has also drastically improved the underlying profitability in each segment, with aerospace in particular seeing a massive improvement.
As a result, free cash flow generation has exploded with operating profits following closely behind. The firm has subsequently surpassed internal expectations from before he took the corner office by more than double. And with another £250m in annual savings still to be achieved, profitability improvements appear on track to continue.
Pairing all this with a natural cyclical recovery within the global travel market has only amplified the group’s performance. And after years of complacent leadership, it seems investors have finally found their ‘white knight’, triggering the share price rally.
The road to £5
Given all the positivity surrounding this enterprise, it’s unsurprising to see analysts update their forecasts to be far more bullish. However, it’s important to note that the prediction of the stock price reaching 520p is a best-case scenario.
With the tailwinds of the travel industry recovery soon coming to an end, growth in sales and, subsequently, operating profits could start to slow considerably. In such a scenario, momentum may subside and could even trigger a reversal in the stock’s progress seen over the last 12 months.
On average, analysts expect Rolls-Royce shares to stabilise near 410p, with some predicting another decline in the coming months. In other words, the opportunity to snap up shares in this business for explosive growth may have already passed by. That’s why, personally, I’m looking elsewhere for buying opportunities to propel my wealth.
