The Rolls-Royce (LSE:RR.) share price enjoyed a splendid 2024, climbing 96%. With the FTSE 100 rising by only 6% in the same period, the company has yet again become the standout performer in the index.
What’s more impressive is that from the start of 2023, its shares have returned 529% to investors. The Footsie has only returned a tame 10% in comparison.
Now, the company’s market-cap is £50bn on the back of trailing 12-month revenue of £17.8bn and profit of £2.3bn. It’s therefore difficult to imagine its shares continuing such a monstrous run going forward.
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However, Rolls-Royce shares have consistently defied expectations over the last couple of years, so let’s look at what they might do over the next 12 months.
The bull case
The great thing about Rolls-Royce is that it’s a company with solid fundamentals. Over the last couple of years, its performance has been trending in the right direction.
Firstly, its half-year results for 2024 continued the business’s strong growth with revenue rising from £7bn to £8.2bn. The company’s operating profit also increased from £670m to £1.15bn. This represents operating margins expanding from 9.7% to 14%, which shows that management’s running the company well.
Secondly, Rolls-Royce is continuing to improve its balance sheet. At the end of 2022, the company’s net debt was £3.3bn. As of its latest results, it was only £820m. Free cash flow is also expected to be an impressive £2.1bn-£2.2bn for the full year.
Because of this, the firm’s been able to reinstate its dividend for FY24, which will be paid in 2025. They will pay this based on a 30% pay-out ratio, which will be maintained at 30-40% each year thereafter. This is great news for shareholders.
Finally, it looks like momentum’s on the company’s side. For the 10 months to 31 October 2024 large engine flying hours grew 18% to reach 102% of 2019 levels. This, which was finally breached after the pandemic, could fuel further growth for Rolls-Royce.
The bear case
Even though Rolls-Royce has a great underlying business, doesn’t necessarily mean it’s a great investment for the year ahead.
Notably, the company’s trading with an expensive forward price-to-earnings (P/E) ratio of 29. This is almost double that of the UK stock market.
Therefore, any negative news could send its shares crashing. For example, Donald Trump made it clear in his election campaign that tariffs are going to be a major policy of his once he becomes President. If he decides to impose tariffs on UK firms supplying US ones, this could hurt Rolls-Royce, as it supplies engines to large US aircraft manufacturers like Boeing.
I also think it’s very possible that after two years of tremendous share price appreciation, investors could take some profits off the table. This could create downward pressure on the share price.
Verdict
Overall, I think Rolls-Royce is a great company, but I also believe its shares already have a lot of future growth priced in. That said, while expensive, I don’t think a forward P/E of 29 is ridiculously expensive. Therefore, I can see its shares rising modestly over the next year to between 600p and 620p. This won’t represent a 96% return like last year but it isn’t bad either so it may still be one to consider.
