Rolls-Royce (LSE:RR) shares are up 74% over the past year. At 715p, the stock’s some way off the 818p highs from earlier this year. Based on my own view and the forecasts from some leading institutions, an investment of £1,000 right now could yield impressive results going forward.
The experts’ view
Throughout April, some analysts at banks and broker firms have updated their forecastS for the growth stock. Of the 23 analysts currently providing a view, 72.7% have a Buy rating. One that stood out to me last week was the 900p price target for the coming year from Morgan Stanley.
The mean price target across the board is 808p. The highest current recommendation I can see is 960p, with the lowest 240p. Using the average, it indicates that the consensus view is that Rolls-Royce shares could head higher, with the £1,000 potentially being worth £1,130 if the price target of 808p is met.
However, investors should note that these are still subjective views. The analysts do their research, but the forecasts shouldn’t be taken as fact.
My view
Last month, I wrote about why I felt the Rolls-Royce share price could move higher. One reason is focused on valuation. The latest full-year report showed earnings per share increased by 47%. The stock currently has a price-to-earnings (P/E) ratio of 35.87.
Given the positive outlook that the management team’s providing, I expect the earnings per share can grow by a further 20-25% this year. So if we assume the P/E ratio stays the same, the bump could push the share price to 858p. If correct, this would turn £1,000 now into £1,216.
The main risk to my view (funnily enough) is also valuation. The P/E ratio’s high, over double the 16.3 from the FTSE 100 index. I know it’s a growth stock, but this premium’s high.
The company will need to provide investors with enough confidence in quarterly updates that the earnings growth is realistic. If not, then people will start to lower their expectations of the pace of future growth, lowering the share price as a result.
The bottom line
Regardless of the exact forecast, I believe the outlook for the company is positive overall. Even with regard to the US tariff uncertainty, the firm shouldn’t be too impacted. Sure, the US is a big market, but it has manufacturing facilities in the country, so this should offset worries about significant disruption.
If anything, it goes to show the diversified nature of global operations that the company can be proud of. The share price can’t escape volatility in the short term. But when looking with a long-term lens, I feel it’s a strong stock for an investor to consider adding to their portfolio.
