The last 12 months have been exceptional for the Rolls-Royce (LSE:RR.) share price. The engineering stock has more than doubled since September 2024 as management continues to execute its turnaround strategy. But with so much growth now under its belt, could the stock continue to climb from here?
What’s on the horizon?
The strong momentum behind Rolls-Royce shares has been driven by a variety of factors. But one of the leading reasons is the ongoing operational improvements that have enabled the company to systematically outperform earnings expectations.
In fact, following the group’s latest results, the analyst team at Citigroup raised its 12-month share price target to 1,440p. Compared to where the Rolls-Royce share price stands today, that represents a roughly 37% potential capital gain. And if this forecast proves accurate, investing £5,000 right now could grow to £6,852 by this time next year.
Digging deeper, the optimistic outlook for Rolls-Royce shares isn’t entirely surprising. The company’s multi-billion-pound free cash flow generation continues to expand. And the subsequent profits are being allocated towards fixing the cracks on its balance sheet by lowering its still-substantial pile of debt.
With its financial health improving and multi-year potential tailwinds within its energy-focused segments emerging, Citigroup’s optimism doesn’t appear out of place. Having said that, not every institutional analyst is on the same page regarding valuation.
The analysts at JP Morgan cited similar bullish sentiment surrounding the operational improvements at Rolls-Royce. But the price target was notably lower at 1,040p, roughly where the stock’s trading today. In other words, there’s a possibility that all of the expected growth is already baked into the share price. As such, a £5,000 investment could still only be worth around £5,000 a year from now.
Forecasts aren’t guarantees
Despite the bullish sentiment, neither Citigroup nor JP Morgan analysts believe this business to be a risk-free opportunity. With the turnaround steadily moving towards completion, the level of execution risk is falling. But there remains a persistent threat surrounding its supply chains.
Rising geopolitical tensions and combative trade policies don’t exactly create ideal operating conditions for many of the firm’s civil customers. And while Rolls-Royce has benefited from increased defence demand, the bulk of sales still originate from the commercial aerospace sector – a market that’s highly sensitive to global developments and economic cycles.
There’s also the question surrounding competitive threats. A big part of Rolls-Royce’s long-term potential revolves around its small modular reactor (SMR) nuclear technology. But this isn’t the only business looking to capitalise on the accelerating demand for affordable nuclear energy. And continuous innovation from its peers could not only steal market share but also undercut the company’s pricing power.
The bottom line
All things considered, Rolls-Royce appears to be a vastly improved business with exciting potential. But it’s also surrounded by looming operational complexities and competitive dynamics – threats that management has little control over.
Adding to the risk, the Rolls-Royce share price could already reflect the expected long-term gains. With that in mind, investors may be better served by looking at other under-the-radar opportunities in this sector.
