Could the Rolls-Royce share price surge be back on again?

The Rolls-Royce share price peaked in early 2024, and then started to fall back… and then picked up again. Here’s what I think about what comes next.

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The Rolls-Royce Holdings (LSE: RR.) share price peaked in March at 435p, and then fell back under the 400p level again.

And it triggered a whole load of hand-wringing.

Is the big climb over? I mean, that quadrupling in less than two years couldn’t keep on going, could it? At the very least, this must be the correction we’ve been waiting for, right?

Heading up again

But then look what happened. The bears had barely started growling when the Rolls-Royce share price started climbing again.

But where it will go next is anybody’s guess. I can see reasons why we might still be in for a share price fall now.

And I can also see arguments why Rolls shares might still be undervalued. And they could still show more growth this year.

Valuation

The biggest negative I see now is the stock valuation. We’re looking at a price-to-earnings (P/E) ratio of 28 for the current year. And that could be a bit steep.

And, though, earnings are expected to rise in the next few years, we’d still see a P/E of 21 by 2026 if the analysts are right.

On top of that, those earnings forecasts are starting to soften a bit. And when a growth stock like this goes off the boil, even just a little, we can often see the price fall.

Peers

It’s hard to compare Rolls-Royce with any sector peers, as there aren’t any other big aero engine makers on the London stock market.

But BAE Systems, also driven by the defence business, is on a forward P/E of 21 today, dropping to 17 by 2026. And though Rolls dividends look set to come back soon, BAE is already on for a 2.2% yield.

Is that a fair comparison? It’s hard to be sure. Forecast growth is stronger at Rolls, but forecasts are always uncertain.

Where next?

I don’t see much that could drive the Rolls-Royce share price in the next few months.

First-half results are not due until August. We should have a trading update before then, but we could still be a few months without any news.

And when a popular growth stock isn’t in the headlines for a while, sentiment can move elsewhere. At least temporarily.

Debt

I can tell you one thing I’m not worried about, though, and that’s debt. It’s the thing that, at one stage, we thought might even send Rolls-Royce to the wall.

But the company has done a great job of getting it down. At the end of 2023, net debt stood at £2bn, which might sound like a lot. But that’s down from £3.3bn the year before.

And this is a company with a £35bn market cap, and annual revenue of around £15bn. It’s managing the debt just fine.

Bottom line

So what’s my take? I think this is the closest to an uncertain, could-go-either-way, point we’ve seen from Rolls in the past few years.

If I had to guess, I reckon the Rolls-Royce share price is most likely go sideways for the next few months.

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.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended 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.

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