It’s so far been another stunning year for the Rolls-Royce (LSE:RR.) share price. It’s up 78% since 1 January, taking total gains over the last five years to a stunning 952%.
But the FTSE 100 engineer has fallen sharply since late September’s record high of £11.90 per share. It was last changing hands at £10.30.
Is the party over for Rolls-Royce shares? City analysts don’t think so, predicting double-digit gains during the next month. But can we really believe current forecasts?
18% price rise
First things first. It’s important to note that — for any stock — broker estimates often end up missing on the high or the low side. It underlines the importance of doing your own research and consulting a range of opinions to get a balanced view.
In the case of Rolls-Royce, there’s a good range of estimates on offer, with 14 analysts currently rating the share. On the plus side, one especially bullish forecaster has a price target of £14 per share by this time next year. That’s up more than a third from current levels.
At the other end of the scale, one broker thinks the company will slide back to 900p. That represents a double-digit decline.
On the whole, forecasts for Rolls shares are massively optimistic. The average price target from City analysts is around £12.19 per share, up 18% from today’s levels.
What next?
So what factors could sweep Rolls-Royce’s share price to new heights?
Most critically, the civil aerospace market remains rock-solid, helping the company enjoy many new contract wins (especially from Asia Pacific) so far this year. Demand could remain strong as global passenger numbers steadily grow. And with recent efficiency improvements boosting delivery rates, Rolls is on a stronger footing to capture this opportunity.
Signs of progress on its next-generation UltraFan engine (currently in testing) could also raise confidence in Rolls’ core division.
Elsewhere, the outlook for its Defence and Power Systems units remains extremely bright. Its small modular reactors (SMRs) could also potentially supercharge profits at its Nuclear arm.
That said, there are also significant threats that could hold hold back Rolls’ share price (or even cause it to fall).
The vast majority of its earnings are cyclical in nature. So with the global economy facing severe challenges, the strong profits growth City analysts expect is less than assured.
Other problems include supply chain issues and rising costs, and severe foreign currency risks given its diversified global footprint.
Here’s my view
I have a nagging thought at the back of my mind. Does Rolls-Royce’s share price explosion limit scope for further gains? In other words, could the good news around the engineer now be baked in at current prices?
Today its shares change hands on a price-to-earnings (P/E) ratio of 38 times. To put that into context, the broader FTSE 100 today carries a P/E multiple just above 12. That makes its shares look mighty expensive in my view.
Not only could this prove a roadblock for additional share price gains. A valuation like this leaves Rolls vulnerable to a price correction if market confidence begins to waver.
For this reason, I’m happy to leave Rolls shares on the shelf. I’d rather find other more reasonably priced stocks to buy.
