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 Legal & General Ucits Etf Plc - L&g Cyber Security Ucits Etf 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 Legal & General Ucits Etf Plc - L&g Cyber Security Ucits Etf 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 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.

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

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

This FTSE 250 share offers a juicy 9.8% yield. Will it last?

This well-known FTSE 250 share has a percentage dividend yield approaching double digits. Should Christopher Ruane add the income share…

Read more »

Investing Articles

Is a £333,000 portfolio enough to retire and live off passive income?

A third of a million pounds can generate a serious amount of passive income, but relying on this sum alone…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing For Beginners

Why FTSE 100 investors should pay attention to ‘Liberation Day’

Jon Smith explains why the upcoming tariff announcement from across the pond could have an impact on the FTSE 100,…

Read more »

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

Here’s why Nvidia stock fell 13% in March

The Nvidia stock price rise was looking unstoppable. Should investors now be wondering if the same might be true of…

Read more »

US Stock

It’s ISA deadline week! Here’s my 3-step game plan

Jon Smith tries to calm the hype around the last minute ISA rush to buy stocks and explains why he's…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

£10,000 invested in BAE Systems shares at Christmas is now worth…

BAE Systems shares have been surging in the FTSE 100 in 2025, driven higher by the wavering US commitment to…

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 »