There are a wide range of views on where Rolls-Royce (LSE:RR.) shares will head over the next year. This isn’t anything out of the ordinary — it’s this difference in opinions that allows stock markets to function.
However, the range of price targets for this particular FTSE 100 company is vast. One analyst believes it will rise 46% over the next 12 months, to £17.40 per share. Another one thinks the engineer will fall as much as 24%, to 900p.
So which one might be proved right? Or might both be wrong?
The case for £17.40
Rolls-Royce’s share price has rocketed 87% over the last year, and 965% over five. The reason? A strong record of consistently beating profit and cash flow expectations. It beat analyst targets again in February when it announced underlying operating profit of £3.5bn in 2025, up 38%, and raised this year’s forecasts too.
It faces strong competition, but robust end markets and strong execution mean the FTSE firm continues to impress. This has also allowed the business to step up share buybacks, more of which could follow to give the share price an added bump.
With its successful streamlining programme continuing, it’s possible Rolls could continue wowing investors. A bright outlook for its Civil Aerospace and Defence units also suggests another strong year ahead.
Why Rolls shares could drop to 900p
Yet past performance isn’t a reliable guide to the future. And with an escalating conflict enveloping the Middle East, risks to earnings and the share price are rising.
The biggest threat is an indirect one springing from the airline industry. Rolls-Royce makes roughly 60% of profits from activities like selling aircraft engines and providing aftermarket services. The consequences of the war on carriers’ fuel costs and ticket sales could be considerable, reducing flight hours and demand for engine services.
The Iran War threatens to worsen the company’s ongoing supply chain problems too. This has the potential to send its own cost base soaring, impact day-to-day operations and derail key growth projects.
The verdict
It’s important to note that analysts are largely optimistic on the engineer. There are 15 currently rating the FTSE 100 stock. Their average 12-month share price target is £14.42, up 21% from today’s levels.
So investors should pile in and buy Rolls-Royce shares, right? Let’s pull back a second, and consider how expensive the company is. At £11.88, Rolls’ share price carries a price-to-earnings (P/E) ratio of 31.4 times. That’s more than double the long-term average of 15.
At these levels, I think the good news around the firm and its share price prospects are baked in, limiting scope for a fresh move higher. That’s not all — it could potentially lead to a correction if the sparkling trading updates investors have been used to begin to dry up.
Given the threats we’ve described here, this is a real possibility in my book. I’d be shocked to see Rolls shares drop all the way back to 900p. But in the current climate I think a slump could be on the cards, meaning I’m looking to buy other shares instead.
