Rolls-Royce (LSE:RR) has been the standout performer of the FTSE 100 for 2024. Over the past year, the Rolls-Royce share price has jumped 129%. Various bank and broker research teams have rushed to increase their price targets for the company in recent months. However, one team has posted an interesting forecast which caught my eye.
Analyst views
Last week, the research team at Barclays led by Milene Kerner updated its 12-month share price target for Rolls-Royce. It set it at 540p. For context, the stock opened this week at 546p, so this is a clear message to me that the Barclays team doesn’t see any gains in the stock for the coming year.
I imagine that a more thorough research report will be coming out shortly, detailing the reasons behind this price target.
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Of the wider 21 analysts that cover the stock, the consensus share price target is 570p. So it’s clear that Barclays is below the average. However, it’s a major UK bank that has a respected research department, so I do take its view seriously.
As a disclaimer, price targets from the professionals shouldn’t be taken as fact. It’s simply an opinion, but given the expertise in this field, it’s always a factor I take into account when thinking about buying a stock.
Why the forecast might be right
One reason why the share price might stall around 540p is due to the fact that the stock’s becoming overvalued. Even at current levels, the price-to-earnings ratio is just under 40! This is almost four times the figure I use to assign a fair value.
The stock is at all-time highs, having rallied 539% over just the past two years. I accept that two years ago the company was highly undervalued, but I struggle to see how it’s now appealing to a potential new investor like myself.
I’ve seen it on many occasions in the past where a company has started a transformation (like Rolls-Royce has) and achieved fantastic efficiencies. Yet after a couple of years, it’s harder to make the same kind of improvements, as most of the obvious fixes have been implemented. Therefore, I think the big move in the stock price from the transformation has already happened, with future gains limited.
Avoiding FOMO
Of course, I wish I had jumped on the bandwagon and bough the stock last year. But there reaches a point where I feel I’d just be buying it now out of FOMO (fear of missing out). That’s never a good reason to buy a stock.
It’s true that Barclays could be wrong, with the share price moving past 600p and beyond in 2025. To see this, I think the annual results releasing early next year would need to beat expectations. Further, if supply chain issues ease into next year, this could significantly improve production speed and lower costs further.
I’m going to sit on my hands for the moment, but would be happy to buy a dip if the share price fell.
