At the moment, the Rolls-Royce (LSE:RR) share price is on a tear higher. Up 83% over the past year, the stock has hit highs of 160p. There’s a lot of debate as to whether the company has put the worst behind it, or if this is just a false dawn. Leading analysts at top banks have put out their price targets for Rolls-Royce shares, and there’s a lot to digest!
Misplaced optimism
Let’s start at the low end. JP Morgan, one of the largest banks in the world, has a price target of just 90p for the company. These targets (usually covering a period of 12 months) would reflect a 40% fall in the stock from current levels.
It flagged up various points of concern for investors to take note of. One element is regarding the reduction in debt levels. Following the sale of ITP Aero, it was able to reduce net debt from £5.1bn to £3.3bn as of the latest annual report.
Yet reducing debt organically from here is going to be hard. JP Morgan notes that it leaves the business exposed to cash flow shocks in coming years. This would be particularly evident if a lot of cash is being used to pay down debt.
Another point was made regarding the new CEO, Tufan Erginbilgic. Despite all the positive noises made around a fresh start and a new strategy, the bank flagged that this was the same chatter made with the previous two CEOs as well. As such, the share price could be inflated on hot air.
Reasons to be positive
At the other end of the scale, US-bank Citigroup has a share price forecast of 255p. This is 70% above the current price!
It explained that it expects widebody aircraft to continue to see client demand recovering. As such, the Civil Aerospace division could do well. This would be very interesting (if realised), because pre-pandemic, this division accounted for the majority of revenue at the company.
The analysts also disagree with JP Morgan regarding future cash flow. From the deep-dive research, they said they expect strong underlying cash flow improvements over the next five years. Cash flow is the crucial element to any business, so if this is correct, then the stock could rally as investors feel more comfortable with Rolls-Royce.
Differing views
Clearly, not everyone is going to have the same opinion on a stock. That’s why it’s key for each investor to note all the different research and come to their own conclusions before buying or selling.
The half-year results aren’t due out until August. Therefore, investors won’t have any new information to digest for a while. In the meantime, the stock will likely trade based on broader market sentiment and be linked to how the airline sector performs.
