It’s no secret that Rolls-Royce (LSE:RR.) shares have vastly outperformed over the last five years. Since November 2020, the aerospace and engineering giant has grown its market-cap by a staggering 1,478%. And that’s before counting the extra gains of the recently reintroduced dividend.
But could more explosive growth be on the horizon? Here’s the latest projections from the experts.
Latest share price forecasts
As one of the most popular stocks in Britain, Rolls-Royce receives a lot of attention from institutional investors. And right now, even after its impressive surge, sentiment among these experts continues to be quite bullish.
Thirteen out of 18 analysts recommend buying Rolls-Royce shares even at today’s prices. And while there are differing opinions regarding the intrinsic value of the shares, there still seems to be more room for growth.
Morgan Stanley‘s issued a 1,250p price target. JP Morgan‘s slightly higher at 1,300p. And Citigroup‘s currently the most bullish with a 1,440p forecast. Compared to where the stock trades today, that’s a 28% projected capital gain – three and a half times more than the average annual return of the FTSE 100. And in terms of money, a £5,000 investment today could grow to £6,400 by this time next year.
Digging deeper
Forecasts always need to be taken with a healthy pinch of salt. They rely on several assumptions that aren’t guaranteed to come to pass. And blindly relying on even professional projections can lead investors astray.
So what assumptions are these bullish institutions relying on?
While there are some differences in their investment theses, there are several areas where opinions overlap. All three cite the firm’s impressive operational turnaround under the new leadership of Tufan Erginbilgiç, unlocking vastly superior free cash flow generation.
The experts anticipate further margin expansion over the coming years through cost-cutting initiatives, alongside continued momentum within both the civil and military aerospace sectors. And considering Rolls-Royce continues to make progress on its medium-term targets, these assumptions don’t seem unreasonable in the slightest.
What could go wrong?
Despite their optimistic outlook, all three teams of experts have identified notable threats to this FTSE 100 enterprise.
The bulk of revenue continues to stem from the aerospace sector rather than defence and energy. And while things are currently going well, it’s important to remember that air travel’s notoriously cyclical. Rising geopolitical tensions and macroeconomic slowdowns can have a significant and adverse effect on travel for both business and holidays.
Looking further ahead, while there’s excitement for Rolls-Royce’s small modular reactors (SMRs), questions surrounding economic viability and competitive forces are starting to rise. Given that SMRs are expected to play a key role in the group’s long-term growth, any hint of weakness could trigger some profit-taking activity.
Still worth considering?
The last few years have perfectly demonstrated why underestimating Rolls-Royce shares is a bad idea. And while some of the share price momentum might be based on future growth, there’s no denying the company’s in a massively stronger position compared to even before the pandemic threw a massive spanner into the works.
Having said that, I’m not eager to buy the shares right now. That’s because I’ve spotted another player in the aerospace sector executing its own impressive Rolls-Royce-like turnaround offering significantly greater long-term growth potential.
