It’s amazing to think that Rolls-Royce (LSE: RR) shares started the year at 93p. At just under 300p today, they’re on course for their best year since the engineering company listed in 1987.
And they’ve now recovered all the ground they lost during the pandemic and are up around 3% over five years.
The momentum is incredible. Could this FTSE 100 stock now rise above 500p next year? Here’s my take.
Higher price targets
The bull case for more share price appreciation in 2024 is supported by recent broker upgrades.
Analysts at Bank of America and Deutsche Bank have both slapped a 400p price target on the stock. The former sees dividends returning next year if and when Rolls achieves an investment-grade credit rating.
Meanwhile, UBS bumped up its base case for Rolls shares to 400p and Citi lifted its target to 431p from 294p.
All this followed the company’s well-received capital markets event on 28 November. There, CEO Tufan Erginbilgiç outlined plans to generate free cash flow of £2.8bn to £3.1bn over the medium term.
Part of this strategy will include the disposal of £1bn to £1.5bn worth of assets over the next five years. Notably, its electric flight division is set to be sold if the right price is found.
Promising tailwinds
Looking ahead as a shareholder, I’m excited by the growth opportunities for Rolls-Royce.
Its largest unit, Civil Aerospace, should benefit long term as global air travel expands. Indeed, this market is expected to double by 2040, according to the International Air Transport Association.
Boeing is forecasting that widebody planes (many powered by Rolls engines) will comprise 45% of its deliveries to Middle East airlines over the next 20 years. The region is a massive growth market.
Plus, CNBC recently reported that the desire to fly abroad among Chinese leisure travelers surged from 28% to 52% in just the last year. There are over 1bn people in China, with a growing number of them wanting to travel. This a very powerful (arguably unstoppable) trend.
Additionally, we’re living through what some are calling the ‘Second Cold War’, meaning global defence budgets are likely to remain elevated for years. Related to this, an international agreement was just signed between the UK, Japan, and Italy to develop a new supersonic stealth fighter jet.
Rolls is involved in that, and its Defence unit should benefit as more international security partnerships are forged.
500p next year?
While many of these trends and projects won’t drive near-term profits, they do highlight how the firm could become much larger.
However, in the present, the company’s civil aviation business is always vulnerable to another pandemic or external shock. It’s an ever-present risk, especially as the firm is still reducing the debt on its balance sheet.
That said, the valuation still looks attractive to me, despite the much higher share price. Next year, we’re looking at a price-to-earnings (P/E) ratio of 23, going on the forecast earnings per share.
That translates into a price-to-earnings-to-growth (PEG) ratio of approximately 0.8. As a general rule of thumb, a PEG ratio of one or lower suggests a stock is fairly priced or possibly even undervalued.
Based on this, I reckon the stock could well reach 400p in 2024, though perhaps 500p might be a stretch too far.
Either way, I’m keeping hold of my shares, and I don’t think it’s too late for investors to consider adding Rolls stock to a portfolio.
