After yet another stunning set of results, Rolls-Royce Holdings (LSE: RR.) shares have climbed further. We’re now looking at a gain of more than 1,100% over the past five years. That means every pound invested back then has grown to more than £12 now. So a £5,000 investment five years ago will have ballooned in value to around £60,000 today.
Is this a good time to pause for breath and take a look at what City experts think the future has in store for Rolls-Royce shareholders? I think it might be.
Analysts say yes
Forecasts are strongly positive and there’s a pretty overwhelming Buy consensus on the stock right now. In fact, in the hours after Rolls released its latest results, brokers were rushing to say how good they feel. Analysts at JPMorgan Chase, for example, quickly reiterated their Buy recommendation — with a 1,625p price target on the shares.
Admittedly, that’s at the top end of the current target range. But here’s where it gets exciting…
Expert predictions over the past few months have all been based on existing profit forecasts for the next few years. And they’ve just been rendered obsolete, as Rolls-Royce blasted through market expectations for 2025.
Two years early
CEO Tufan Erginbilgiç wowed the market again, as he seems very adept at doing. This time, he said: “Based on our 2026 guidance, we expect to deliver underlying operating profit within the prior mid-term guidance range two years earlier than planned.“
He added: “Our upgraded mid-term targets include underlying operating profit of £4.9bn-£5.2bn and free cash flow of £5.0bn-£5.3bn.“
So does that mean analysts are all going to simply bring their forecasts forward by two years? Well, that seems unlikely. Many of the items on the agenda will depend on more than just operating profit and cash flow. But you know, I can’t help feeling 2026 forecasts, when they’re updated, might be more impressive than the now-out-of-date 2027 hopes we currently have.
Forecast valuation
Right now, analysts put Rolls-Royce shares on a forward price-to-earnings (P/E) ratio of 40 for the current year. To emphasis again, that doesn’t take into account the big boost to Rolls’ profit and cash flow guidance coming after the latest results.
But if earnings-per-share expectations come forward by just 12 months, we might see that P/E reduced to 34 this year. Don’t get me wrong, that’s still high — more than twice the FTSE 100 long-term average. But I don’t see it as outrageous — even if it does perhaps still leave me feeling a bit nervous.
What next?
So what should we do? My immediate feeling was that the current valuation on Rolls-Royce shares doesn’t leave enough safety room for me. But then, I’m more advanced in my investing career than many, and I’m a lot more cautious than I used to be when I was younger.
Is there still room for investors to do well if they consider buying even now? I really think there might be. It’ll be interesting to watch broker upgrades in the coming weeks.
