Approaching £5, is there still growth ahead for the Rolls-Royce share price?

The Rolls-Royce share price has been flying in the last year. But is there more growth ahead or should investors consider taking profits?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Rolls-Royce 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.

The Rolls-Royce (LSE: RR.) share price has soared, nearly tripling over the past year to breach £4.70. As the British engineering icon continues to post stellar financials and ambitious growth targets under CEO Tufan Erginbilgic, investors have piled in. But with the stock nearing £5, one question looms — can this trend really continue?

The story so far

The fundamental turnaround fuelling the rally is impressive. 2023 revenues surged 22% on the post-pandemic recovery. Stunningly, the company managed to turn a £1.5bn statutory loss into a £2.5bn profit, doubling free cash flow along the way. Newly-raised growth targets suggest to potential investors that there could be a lengthy growth runway ahead. Clearly, the market likes what it sees, with the share price now up over 195% in the last year alone.

Created with Highcharts 11.4.3Rolls-Royce Plc PriceZoom1M3M6MYTD1Y5Y10YALL1 Jun 201930 Jun 2024Zoom ▾Jul '19Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '242020202020212021202220222023202320242024www.fool.co.uk

However, that optimism appears well priced in to Rolls-Royce’s share price. At 29.5 times forward earnings — over double the FTSE 100 average, the company now ranks among the UK index’s most expensive names. Even extending to 2027 projections, the shares fetch nearly 20 times that year’s forecast profits.

Should you invest £1,000 in Spirax-sarco Engineering Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Spirax-sarco Engineering Plc made the list?

See the 6 stocks

Risks

To be fair, the stellar 28% forecast annual earnings growth justifies a premium 1.04 price-to-earnings-growth ratio, considered attractive. But it also illustrates how investor expectations have become very elevated after the recent rally. Any execution stumbles or external shocks could quickly lead to some destabilising profit-taking.

Despite the strong movement in the share price, there are plenty of red flags for me. With earnings expected to decline over the coming years by about 4% annually, I’d expect there to be a little more volatility. With limited dips in the last year, I wouldn’t be surprised to see a major decline if sentiment suddenly shifted, and investors suddenly decided to take profits.

There’s also the major issue of debt. In a time of high interest rates, and general uncertainty, the company’s £4.2bn debt could make investors very nervous.

Analyst outlook

Over a dozen analysts recommend buying Rolls-Royce shares with just one Sell rating, which looks good on the surface. But their average price targets sit modestly below the stock’s current price level — possibly underestimating recent momentum, but also suggesting that a degree of scepticism lingers.

I feel like this scepticism is somewhat warranted given the firm’s history of overpromising and underdelivering growth under past leaders. Any change in economic projections, or geopolitical issues, could also impact the key defence unit.

Overall

After such a spectacular rebound, investors have clearly seen a lot to like in this company. But for me, I fear that some really critical risks aren’t being factored in to the share price, and I don’t want to be buying shares just as another major decline arrives. I’ll be steering well clear for now.

But there may be an even bigger investment opportunity that’s caught my eye:

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won't want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we're giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI stock pick

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.

Gordon Best 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.

More on Investing Articles

Investing Articles

These FTSE 100 stocks could be the winners from Trump’s tariffs!

President Trump’s unpopular tariffs caused mayhem on the world’s stock markets this week. But some FTSE 100 stocks bucked this…

Read more »

Investing Articles

Are these 3 sold-off UK shares secretly screaming buys?

Despite the FTSE 100 rising, there are still plenty of struggling UK shares. But are these three sold-off stocks potential…

Read more »

Investing Articles

Is the US stock market set to crash in April?

Panic about a looming stock market crash is spreading, but what could be the tipping point? And what can investors…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Investing Articles

As the stock market has a meltdown, I’m listening to billionaire Warren Buffett

Our writer has been following Warren Buffett in recent weeks by repositioning his portfolio to take advantage of the market…

Read more »

Investing Articles

How much would an investor need in an ISA for a £100k passive income?

Zaven Boyrazian breaks down how much investors need to put aside each month to potentially earn a six-figure tax-free passive…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

In my opinion, this FTSE growth stock looks set to soar over the next 5 years!

Our writer thinks this UK growth stock could benefit from the current excitement surrounding artificial intelligence applications.

Read more »

Investing Articles

0.45x EV-to-EBITDA: this is the cheapest UK stock, IMO

This UK stock has come under increasing pressure in recent weeks, but I don’t think it’s warranted. Here’s a closer…

Read more »

Investing Articles

Can the Rolls-Royce share price hit £13 in the coming year?

After a stunning couple of years for the Rolls-Royce share price, can it keep up its recent momentum? This writer…

Read more »