If I’d bought Rolls-Royce shares a year ago, here’s what I’d have now

Rolls-Royce shares have been the big FTSE 100 success story of the past 12 months and more. And there’s still bullishness behind them.

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Anyone who bought Rolls-Royce Holdings (LSE: RR.) shares this time last year would now be sitting on a gain of about 190%.

That’s enough to turn every £1,000 invested in the stock into £2,900. Shame I didn’t buy any.

But what might happen in the next 12 months? Well, the short-term future is the hardest to predict when it comes to the stock market.

But I’m going to stick my neck out and say… I don’t think we’ll see another 190% gain.

The year ahead

It looked like shareholders were taking some profit off the table. But after a small fall in April, the Rolls-Royce share price has resumed its climb.

So what do the experts think will happen in the next 12 months?

Well, forecasts suggest an 11% rise in EBITDA this year, and that’s just the start. They have a further 14% on the cards for 2025, followed by another 9% in 2026.

We are looking at a fairly high price-to-earnings (P/E) ratio of 31 this year. But those forecast earnings rises could drop that to 22 by 2026.

Is that still a fair P/E for a FTSE 100 growth stock? I think it could be.

Price targets

The City’s analysts seem to think so too, and there’s a pretty strong buy consensus out there right now. What’s more, as the months have been going on, the bullishness has been getting stronger.

Brokers’ price targets aren’t too stretching though. The range looks centred around the 450-500p range at the moment

And with the Rolls-Royce share price at 440p at the time of writing, it seems the analysts join me in not expecting to see another 190% any time soon.

Still, looking at this, I must sound a loud caution. My experience of broker targets over the years has not made me put a huge amount of faith in them.

I reckon that if I were to always rate a stock that’s rising as a ‘buy’, and always put a price target on it that’s a bit more than the latest price, I could probably do as well as most of them.

Long term

This short-term speculation is risky anyway, and I’d only ever consider long-term valuation when making my stock market decisions.

But, at times like today, I do think a look at what folk are saying in the short term can help us. What I mean is, contrarian times when a lot of valuations look upside down.

Then, when we see anything that looks out of line with our long-term assessments, we might have found a hot bargain stock to buy right now.

Verdict

There are some cheap anomalies out there now, I’m sure. But I don’t see Rolls-Royce as one of them.

I do think it’s turning back into a well-managed company with potentially many years of growth ahead of it. I just worry that these short-term gains could turn sour if anything happens to dent market sentiment.

If that does happen, we might just get a cheap buying opportunity.

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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