Rolls-Royce‘s (LSE:RR.) stunning share price run has continued into 2026. At £12.55 per share, the FTSE 100 stock’s now 113% more expensive than it was 12 months ago.
If City forecasts are accurate, Rolls shares are about to scale even greater peaks. One analyst thinks they’ll reach £16.25 within the next 12 months. That represents a 29% premium from current levels.
Okay, that’s far lower than the return investors have enjoyed in recent years. But with dividends factored in, it still suggests a total return of 30%. That’s certainly not to be sniffed at in my opinion.
The question is, can the engineer’s share price really hit these lofty heights? Or is it all just pie in the sky?
Different opinions
It’s important to say that this forecast is just one of 16 estimates for Rolls-Royce. And there are some significant differences in broker views.
One bearish broker thinks the FTSE 100 share will crumble to 900p over the next year. That represents a 28% fall from current levels.
Largely speaking, analysts are positive on Rolls shares, although they’re tipping a far more lukewarm price increase. Instead of £16.25, the average price target among City brokers is £13.04. That represents a 4% uplift from today.
Given the company’s enormous valuation, I’m not surprised analysts see limited price potential from this point. Today it trades on a forward price-to-earnings (P/E) ratio of 38.1 times.
To put that in perspective, it’s averaged roughly 15 over the last 10 years.
So what?
Yet Rolls-Royce shares have commanded a chunky valuation for the last two-to-three years. And this hasn’t prevented its share price from taking flight. Bulls would also argue that the engineer is fully deserving of a premium valuation.
There’s certainly a lot to like about the company. Its recovery under chief executive Tufan Erginbilgiç since 2023 has been spectacular, driving cash flows and profits through the roof through like contract repricing and sharp cost-cutting. There seems to be plenty more to come on this front too.
This leaves Rolls in far better shape to capitalise on its growing markets. The civil aviation market offers significant opportunities as global passenger numbers boom. Rising geopolitical tensions, and growing demand for clean technology, also bode well for its Defence and Power Systems divisions respectively.
What could go wrong?
However, it’s also important to stress the risks Rolls-Royce faces. And given the company’s huge valuation, it’s possible that its shares might topple if its turnaround loses steam.
One threat is supply chain problems that could impact operations and project delivery, not to mention drive up costs. Its worldwide footprint also leaves it vulnerable to adverse currency movements (a falling US dollar in particular is a significant risk).
Then there are huge competitive threats across each of its divisions, and a potential slowdown in Civil Aerospace given rising economic challenges. Arguably the latter is the greatest risk facing the company today. And given that commercial aviation accounts for 70% of Rolls’ operating profit, the potential impact could be dramatic.
I wouldn’t be surprised to see Rolls-Royce share price surge again over the next year. But then I also see a situation where its shares could plunge. I won’t buy the company for my portfolio, but it might be worth consideration from more adventurous investors.
