In the last five years, few British investments have come close to delivering the gargantuan 1,160% return of Rolls-Royce (LSE:RR.) shares. And with a promising outlook across all of its divisions, it seems like this upward trajectory’s set to continue over the long term. Even more so, now that management’s restored dividends, a strong signal of cash flow confidence.
So how much money could an investor make over the next 12 months if they bought 500 Rolls-Royce shares today? Let’s take a look at what the experts are predicting.
Analysing forecasts
The latest general consensus from institutional investors is pretty bullish right now, with 12 analysts ranking Rolls-Royce as a Buy or Outperform, and only one saying Sell. And looking at the share price projections, there’s a chance that Rolls-Royce shares may climb all the way to 1,300p by this time next year.
Compared to where the stock’s trading right now, that represents yet another 30% rise in its market-cap. So in terms of money, anyone buying 500 shares today could make a profit of around £1,526.
That’s obviously exciting. But it’s important to note that this projection is currently the best-case scenario. And it requires the company to deliver seemingly perfect execution across its aerospace, defence, and power systems segments while also keeping up with recent momentum in cost-cutting and margin expansion.
That’s far easier said than done. And not every analyst is convinced the firm can meet such demanding targets. For example, JP Morgan’s share price forecast is notably lower at 1,040p, and the wider average is closer to 940p.
In other words, the realistic growth potential of this business might already be fully baked into its share price. And anyone buying shares today could actually end up losing money rather than making some.
Risk versus reward
Rolls-Royce has made some phenomenal progress towards improving its operational and financial position. And looking at its recent performance, the group appears to be on track to deliver on its ambitious profit and cash flow targets.
However, there’s growing concern that momentum in its civil aerospace business could start to slow in the near term. The bulk of this segment’s profit stems from servicing large engines powering long-haul flights. Yet demand for such services could suffer if discretionary consumer spending on air travel starts to fall.
This creates an indirect headwind for Rolls-Royce. And while the business is partially insulated through geographic and business customer diversification, that may prove insufficient to keep up with lofty investor expectations. For reference, Rolls-Royce shares currently trade at a price-to-earnings ratio of 32.9 compared to the industry median of 23.
The bottom line
As a business, Rolls-Royce appears to be in terrific shape and more than capable of dealing with potentially troublesome headwinds on the horizon. But with most of its potential seemingly already baked into its share price, this isn’t a stock I’m keen on buying today, especially considering there are other promising aerospace opportunities to capitalise on at a much cheaper price.
