The Rolls-Royce share price can’t slow down! But has it gone too far?

The Rolls-Royce share price has been soaring. But this Fool reckons it could keep rising. He explains why.

| 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.

It’s been an incredible year for the Rolls-Royce (LSE: RR.) share price. During the last 12 months, the stock has jumped a monumental 140.4%.

We’ve seen its fine form continue recently. In the last month, the stock has climbed 5.9%. It’s up 6.6% in the last five days alone.

But now sitting at £5.28 a share, what’s next in store for the British icon? While it may seem like Rolls stock can’t slow down, is there a threat that it has gone too far?

Should you invest £1,000 in Rolls-Royce 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 Rolls-Royce made the list?

See the 6 stocks

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

Before we delve into that, I want to explore what has been the catalyst behind its share price soaring in the last week or so. The reason is that Rolls was chosen by CEZ Group, the Czech state utility company, as the preferred choice for its small modular reactor (SMR) programme out of seven potential candidates.

Investors have been getting excited about Rolls’ SMR business for a while now. So, it’s no wonder its share price jumped when this deal was announced.

Valuation

But with its recent rise pushing the share price comfortably past the £5 mark, is there any room for further growth?

There are a few ways to go about answering that question. Let’s start by looking at the stock’s valuation.

It currently trades on a price-to-earnings (P/E) ratio of 19.1. That’s above the FTSE 100 average of around 11. As seen below, when looking ahead its forward P/E rises to 31.


Created with TradingView

Then there’s its price-to-sales (P/S) ratio. As the chart below highlights, its current P/S is 2.5. That’s slightly above FTSE 100 competitor BAE Systems (1.6).


Created with TradingView

More to come?

Based on that, it’s possible to argue that Rolls-Royce is overvalued. But what do the experts see the stock doing in the times ahead?

Fourteen analysts offering a 12-month target price for it have an average price of £5.81, representing a 10.2% premium from where the stock sits today.

Of course, analysts’ predictions can be wrong. However, it’s clear that on the whole, they believe it can keep creeping upwards.

The bigger picture

I can see why. The business has produced a great U-turn from where it was during the pandemic. Under CEO Tufan Erginbilgic, the firm has transformed back into the powerhouse it once was.

Under his leadership, profits have soared. In its most recent half-year update, Rolls posted an operating profit of £1.1bn, up 74% from the same period last year. Looking more long term, the company is targeting £2.8bn in operating profit by 2027.

Of course, that won’t come without challenges. For example, supply chain issues could prove to be a stumbling block. In its update, it highlighted that it expects up to a £200m cash impact to these issues on its free cash flow for the year. There’s the threat that this risk will continue in the next 24 months as well.

But even despite these challenges, this is a stock I like the look of today. While its valuation may look a tad expensive, I’m happy paying for quality. And with Rolls-Royce, I think it has plenty. I’m hoping to have some cash this month so I’ll be picking up some shares.

But here’s another bargain investment that looks absurdly dirt-cheap:

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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.

Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has recommended BAE Systems and 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

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Dividend Shares

2 ‘safe’ LSE dividend stocks to consider as global markets sell off

As global markets experience high levels of volatility due to economic uncertainty, investors are piling into these ‘safe-haven’ dividend stocks.

Read more »

Investing Articles

US stock market rout: an unmissable opportunity for investors?

His tech-heavy portfolio has been smashed by Trump’s tariffs. However, Dr James Fox believes there could be some opportunities in…

Read more »

Investing Articles

After a 13% ‘Trump tariff’ fall, is the Barclays share price too cheap to miss?

Does the Barclays share price fall mean we should all panic and run screaming from the stock market? Nah, of…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

2 investment trusts to consider for a Stocks and Shares ISA

These two investment trusts have a different focus -- but our writer sees both as worth considering, one more for…

Read more »

Investing Articles

Deutsche Bank reiterates Buy rating on 9.6% yielding FTSE 250 stock that was “most shorted in UK”

Our writer investigates why a major broker remains optimistic about a FTSE 250 stock that was once the most shorted…

Read more »

Investing Articles

2 things to remember when stock markets are turbulent

US trade policy has rattled the stock markets in New York, London and elsewhere. Our writer outlines a couple of…

Read more »

Investing Articles

Are Trump’s tariffs a once-in-a-lifetime chance for ISA investors to get rich?

The £20,000 Stocks and Shares ISA limit will reset on 6 April. Smart investors could use current market volatility to…

Read more »

Investing Articles

Here are the latest Persimmon share price and dividend forecasts

Our writer looks at the latest forecasts for the Persimmon share price and considers what level of dividend the stock…

Read more »