535p?! This broker just hiked the forecast for the Rolls-Royce share price

Jon Smith takes a look at the reasons behind a recent target level increase from a major analyst for the Rolls-Royce share price.

| 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: Getty Images

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.

Unless you’ve been living under a rock for the past year, you’ll be aware of the mega rally in the Rolls-Royce (LSE:RR) share price. The 135% jump over the last year means the stock now trades at 487p.

Yet last week, US bank JPMorgan‘s research team upgraded its forecast for the firm. Its analysts indicated that more gains could be coming. Is this realistic?

Shooting for the moon

In a note put out last week by the bank’s analyst David Perry and his colleagues, the share price target for the next year was increased from 475p to 535p. This isn’t a guarantee that the stock will trade at that price, but rather reflects the analyst’s viewpoint.

Should you invest £1,000 in Greggs 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 Greggs Plc made the list?

See the 6 stocks

Perry flagged up that part of the reason for the increase was the strong set of recently-published H1 results. In them, underlying operating profit soared from £673m in H1 2023 to £1.15bn this time. This reflected “the impact of [the] strategic initiatives, with commercial optimisation and cost efficiency benefits across the group”.

Another reason for the share price forecast hike was the increase in free cash flow. Perry explained that the likely boost to free cash flow over the coming year should be due to higher profits, rather than customers simply paying in advance for their orders. Therefore, the cash flow increase is actually good quality rather than just an accounting point.

Created with Highcharts 11.4.3Rolls-Royce Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Why I’m more cautious

I take the price adjustment from JPMorgan seriously and agree with the points made from the strong set of recent financial results.

However, I’m slightly more cautious given that the stock’s now at record high levels. I wrote recently how I was being patient and waiting for a correction lower, at which point I’d look to buy. This hasn’t materialised yet, but I don’t want to jump in with the share price close to 500p.

With a price-to-earnings (P/E) ratio of 35, the stock certainly isn’t undervalued. With my fair value benchmark of 10, I just don’t think buying right now makes sense. Of course, there’s a chance that the stock stays at a high P/E ratio for a long time. This is something I have to accept might happen.

Further, the business flagged up a “challenging supply chain environment” which could pose a risk going forward.

Keeping an eye on things

Don’t get me wrong, I think the firm is well positioned for the long term. The transformation under CEO Tufan Erginbilgiç has been remarkable. But just because I like a company doesn’t mean the stock represent a smart investment right now.

So although some brokers are increasing their price target, I’m going to sit on my hands. In doing so, I’ll try to wait and buy the stock at a more reasonable valuation.

But there are other promising opportunities in the stock market right now. In fact, here are:

5 stocks for trying to build wealth after 50

The cost of living crisis shows no signs of slowing… the conflict in the Middle East and Ukraine shows no sign of resolution, while the global economy could be teetering on the brink of recession.

Whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times. Yet despite the stock market’s recent gains, we think many shares still trade at a discount to their true value.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. We believe these stocks could be a great fit for any well-diversified portfolio with the goal of building wealth in your 50’s.

Claim your free copy now

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.

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Jon Smith 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.

Our best passive income stock ideas

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

More on Growth Shares

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

Up 50%? The Aston Martin share price forecast is mind-blowing! 

If analysts are right, the Aston Aston Martin share price could absolutely rocket in the year ahead. Harvey Jones says…

Read more »

Investing Articles

Up 279% in 5 years, could Meta stock keep soaring?

Meta stock has more than tripled in five years. This writer sees lots to like about the business but also…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

2 popular UK growth stocks I wouldn’t touch with a bargepole in today’s market

Buying growth stocks can deliver market-beating returns, but this FTSE 250 pair doesn't look like a convincing investment for our…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

Around a 1-year high, is there enough value left in Next’s share price to make it worth me buying?

Next’s share price has risen a lot in eight months, but there could still be a lot of value left…

Read more »

Investing Articles

The Rolls-Royce share price has fallen! Is this the moment investors have been waiting for?

Even the Rolls-Royce share price can't escape current stock market volatility, falling slightly over the last week. Should investors consider…

Read more »

Investing Articles

At a 52-week low but forecast to rise 73%! Is this growth share the FTSE’s top recovery play? 

This FTSE 100 growth share has taken an absolute beating over the past two years but Harvey Jones says the…

Read more »

Investing Articles

Up 19% in 2 weeks, can the Tesla share price rebound further?

Tesla's first-quarter delivery numbers came out today. Will they help persuade our writer to invest his money at the current…

Read more »

Young Black woman looking concerned while in front of her laptop
Investing Articles

£10,000 invested in Raspberry Pi shares at the beginning of 2025 is now worth…

Raspberry Pi shares offer something a little different for UK-focused investors. But while the minicomputer company surged after IPO, it’s…

Read more »