Nobody can have failed to notice the Rolls-Royce Holdings (LSE: RR.) share price trebling in 2023.
I thought we might get some sort of recovery. But never did I dream we’d see such a massive change of heart from investors.
It does bring up something I’ve often had trouble with. That’s working out whether growth stocks are good value, and where they might go next.
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Valuation
So let’s start with a look at basic price-to-earnings (P/E) valuations. At the moment, broker forecasts put Rolls-Royce shares on a P/E for the full year of 36.
That looks high on the face of it. But in a turnaround year, from a loss recorded last year, it might not mean that much.
It depends on how the next few years go. And on that score, the analysts see rising earnings and very strong cash flow growth. It could even be enough to pay a 1.2% dividend by 2025.
It would still leave the stock on a P/E of about 20 by then though.
Buy consensus
Now I don’t pay much attention to the City’s buy/sell consensus or share price targets. At least, not as guides to whether I should buy the shares.
But they can give me a few things to play with, in a game of ‘what if’?
Even with today’s bullish valuation, there still seems to be a fairly strong buy consensus out there. Well, that was last time it was updated, at least.
The P/E and dividend forecasts are based on the current share price. And they’ll change if the share price moves.
Future valuations
I’m writing this a few days in advance, what with the Christmas hols and all that. As I write, Rolls-Royce shares are at 290p. And in the past few weeks, I’ve seen brokers with price targets of between 310p and 400p.
Those might not mean much. But I think its worth having a look at what they might do to the forecasts.
Here’s what I get, at the share price at the time of writing, and at each end of that target range:
| Share price | 290p | 310p | 400p |
| P/E 2023 | 36 | 38 | 50 |
| P/E 2024 | 27 | 29 | 37 |
| P/E 2025 | 20 | 21 | 28 |
| Div yield 2023 | 0.1% | 0.1% | 0.1% |
| Div yield 2024 | 0.6% | 0.6% | 0.4% |
| Div yield 2025 | 1.2% | 1.1% | 0.9% |
Those dividends are nothing to shout about yet. But I thought it worth showing how long it might be before yields get up to something that might interest income investors. It looks like it could be a while yet.
The effects of growth
I’m not making predictions here. This is just to give me some idea of how the Rolls-Royce valuation might look if various share price hopes should come to pass.
Think the price will climb as high as 400p? That suggests we’d need to be happy with a possible P/E of 50, based on this year’s earnings. And I don’t think I would.
