Investors who correctly identified Rolls-Royce (LSE:RR.) as one of the best stocks to buy five years ago are understandably laughing right now. The once-struggling aerospace, energy, and defence engineering giant delivered a remarkable turnaround, causing its share price to surge 1,243% since October 2020!
Just to put this into perspective, a simple £5,000 lump sum investment is now worth £67,150. And those who reinvested the recently reinstated dividends along the way have earned even larger returns.
Looking at this jaw-dropping surge, it’s hard not to feel bad for missing out. But with the company still firing on all cylinders, could more impressive growth still be on the horizon?
Here are the latest analyst projections.
Bullish forecasts
Even with so much growth under its belt, the recommendations from institutional analysts remain overwhelmingly bullish. Thirteen out of 18 analyst teams rate the stock a Buy or Outperform. And among these, Citigroup’s the most aggressive, placing a share price target of 1,440p by this time next year.
Compared to where the stock’s trading today, this projection suggests a 28% potential capital gain over the next 12 months. While that pales in comparison to its recent historical performance, that’s still more than three times what the UK stock market typically generates in a year. And it certainly puts Rolls-Royce in the running as a potential top-notch stock to buy.
Digging deeper, this bullish stance seems to be driven by a few factors. But overall, it boils down to further expected operational improvements, strong free cash flow generation, debt reduction efforts, and expected long-term growth from its small modular reactor (SMR) technology.
These themes are fairly similar to other analyst reports. And with the ramp-up in other European defence spending also creating a favourable tailwind, it’s easy to understand why Citigroup’s excited.
Nevertheless, it’s still highlighted some crucial risks.
What could go wrong?
Rolls-Royce operates on a global scale, exposing the business to supply chain disruptions. And with rising geopolitical and trade tensions, this threat’s growing increasingly more likely.
But even if the business continues to outperform on an operational level, the expected long-term growth forecasts may still be too optimistic.
Revenues from its SMR technology aren’t expected to materialise until the 2030s. And with a lot of investments being poured into the nuclear sector, Rolls-Royce isn’t the only business seeking to capitalise on this long-term tailwind.
If its reactors fail to deliver on expectations from an energy generation standpoint, or a rival comes out with a cheaper, more efficient solution, the growth baked into the Rolls-Royce share price today could disappear. And, in turn, that could open the door to unwelcome volatility.
The bottom line
All things considered, I think investors are right to be optimistic about the long-term potential of Rolls-Royce shares. But does that make it one of the best stocks to buy now?
I’m not so sure, especially since there are other aerospace & defence stocks on my radar that might have even more explosive long-term performance on offer.
