The Rolls-Royce (LSE:RR) share price is up 148% over the past 12 months, defying the wildest expectations of many investors. The company’s rebound from potential bankruptcy has been impressive to say the least.
But that’s in the past. Investors are asking themselves whether the FTSE 100 share price can really go any higher. Well, experts covering the stock suggest it can. Let’s take a closer look.
Finding fair value
Analysts — of which there are 17 of them — covering Rolls-Royce hold a broadly positive view on the stock. That’s indicated by eight Buy ratings, four Outperform ratings, three Hold ratings, one Underperform and one Sell.
However, it’s not straightforward. Because the Rolls-Royce share price has moved upwards so quickly, it’s actually trading above its average share price target by 2.5%.
That could be a bad sign if it weren’t for the fact that the latest re-ratings have been positive. The last four reviews — made in November and October — have all been Buy ratings. These have been accompanied by improved share price targets — the highest is 675p.
So as analysts review their coverage of the stock, based on recent re-ratings, we could see the share price target rise further.
Why are analysts bullish?
Analysts are bullish on Rolls-Royce stock due to several factors. But it all stems from significant improvements in its financial performance over the past two years, with operating profits rising and free cash flow projections raised.
The company’s margins in the civil aerospace division have improved dramatically, from 2.5% in 2022 to 18% today. And the defence segment’s seen supportive trends emanating from heightened geopolitical risk.
Moreover, Rolls-Royce has also secured its first investment-grade rating in almost four years, signalling improved creditworthiness. Additionally, investors clearly see some potential in the company’s involvement in mini nuclear reactor projects and potential deals with European countries have contributed to the positive outlook.
Still worth considering?
Rolls-Royce is set to deliver a trading update on 7 November, so there’s definitely the possibility of heightened volatility. Stocks valued on growth potential — as Rolls still is — can be particularly volatile if quarterly earnings surprise investors.
At this point, it’s certainly worth highlighting the downside. At 31 times forward earnings, the market will react negatively to unfavourable commentary, lower earnings, or disappointing guidance. Even the US election could damage confidence in parts of the business, including defence.
However, the long-term trajectory of this company is upwards. Fundamental data and earnings typically determine a share price and it’s hard not to see Rolls-Royce go from strength to strength in the coming years.
The business is set to be trading at 23 times forward earnings in 2026, and earnings could rise further on potentially supportive trends in new aircraft engine demand and maybe a new business in small modular reactors.
Coupled with a likely boost in European defence spending, following Trump’s election victory, I’d continue to be optimistic about the company’s long-term performance. I think it’s worthy of further research.
