At market close Tuesday (20 January), Rolls-Royce Holdings (LSE: RR.) shares were already up 11% since the start of the new year. Is it just the momentum of last year continuing? Or are investors expecting something special from February’s full-year results release?
Following the market can be a dangerous strategy. And it’s a lucky investor who can time it right when it comes to jumping off the bandwagon. But Rolls has rewarded shareholders who kept holding, typically under-promising and over-delivering with each set of results.
What to expect?
Going on November’s trading update, we should expect to see underlying operating profit between £3.1bn and £3.2bn. And free cash flow of £3.0bn to £3.1bn. And that comes after a strong year across all business divisions. At the core, civil aerospace demand has been strong. Large engine flying hours have climbed to 109% of 2019’s pre-Covid levels.
It might need something extra on top of that to push Rolls-Royce shares closer to £15. But that would still only be a further 17% rise from Tuesday’s close. And seeing the price up 110% over the past 12 months, even short-term random ups and downs might be enough to achieve that.
Recent broker upgrades suggest a price target of around £13.50 to £14. That’s not far off, especially considering these are short term. And at the top of the range, we have a target as high as £16.25. It really does look as if the market is expecting another high-flying year for the Rolls-Royce share price. Even if it doesn’t skyrocket the way it did last year.
A slow spell
There’s one main thing that causes me to pause, however. I can see a gap forming here… between aerospace and defence peaking, and profit from Rolls-Royce’s small modular reactors (SMRs) coming online.
Those reactors should potentially fill a number of energy-need niches quite nicely — including escalating AI server demand. But we’re not going to see any significant revenue from the business until into the 2030s.
Forecasters do see earnings per share (EPS) in 2027 coming in around 28% ahead of the 2024 level. But civil aviation has pretty much made it back from the pandemic hit, so recovery-led growth there surely has to slow, doesn’t it?
As for the arming-to-the-teeth response to global conflict… I really hope the driving fears will ease off in the next couple of years. All in all, when see see forecasts for 2028 and beyond, I think we could easily be looking at a steady but slower phase.
Odd one out?
So am I a contrarian nay-sayer when it comes to Rolls-Royce as an investment? No, not really. I’m just extremely cautious when it comes to growth stocks that have already multi-bagged. And I personally like to see more safety margin than might actually be realistic.
For investors who are less risk-averse than me? I reckon they should still consider Rolls-Royce shares even today. And a £15 target doesn’t seem outrageous — but keep in mind there’s a bearish analyst out there who fears a fall to under £8.
