The rise and rise of the Rolls-Royce (LSE:RR) share price remains one of the FTSE 100‘s most compelling stock stories.
At 307.4p per share, the engine builder has soared a spectacular 198% over the past 12 months. And it has started 2024 on the front foot too, up 3% so far since the bells rang in the New Year.
The good news is that City analysts think Rolls shares will continue soaring as well. In fact, a string of brokers (including Bank of America and JP Morgan) have raised their 12-month price targets to, or above, 400p per share in recent weeks.
Analysts at Barclays joined the gang in recent hours. They are now tipping the aerospace giant to fly to 409p per share within the next year.
Is it time for me to add Rolls shares to my portfolio?
Forecasts hiked
Those recent broker upgrades follow Rolls-Royce’s well-received strategy update in late November. Then the company outlined medium-term plans that include operating profit of £2.5bn-£2.8bn and free cash flow of £2.8bn-£3.1bn.
The news prompted Barclays to raise its price target from 270p per share to that new one above 400p. Explaining its decision, the bank said it anticipated “the potential reinstatement of investment grade status as a near-term catalyst… underpinned by a net cash position and strong end-market outlook“.
Barclays also floated the possibility of Rolls shares resuming dividends on the back of these measures, giving the stock price added momentum.
Dangers lurking?
Some investors may have been avoiding buying Rolls shares following its rapid price ascent of 2023, thinking they had missed out. They may be tempted to think again following those price target upgrades that I mention.
Someone who invested today would make a healthy 33% return on their money if Barclays’s price target of 409p is met. And that’s excluding the boost that a possible dividend could give investors’ pockets.
But of course price targets are often never reached. And there are some potentially significant obstacles Rolls may encounter that could hamper future price gains. It could even retreat sharply from current price levels.
Threats to Rolls shares
Rolls’s profits could disappoint, for instance, if the post-pandemic recovery in the travel sector runs out of steam. This might be a result of conditions in the global economy, which are widely tipped to worsen in 2024.
It may also be due to further deterioration in the geopolitical landscape (war in Eastern Europe and the Middle East has already caused the suspension of many flight routes). Lower flying activity could demolish the revenues Rolls makes from servicing plane engines. It could also impact orders of its power units.
Even if conditions remain favourable, the business faces huge competition to sell its large plane engines. As my Foolish colleague Harvey Jones notes, Thai Airways is one of several airlines to switch business due to disputes over Rolls’s pricing. A continuation of this trend would become highly worrying.
Supply chain disruption and higher-than-usual inflation are other threats to the firm’s profits and cash plans.
Today, Rolls-Royce shares trade on a forward price-to-earnings (P/E) ratio of 29 times. It’s the sort of high valuation I think could prompt a sharp price retracement if company news cools even slightly.
So right now I’d rather search for other FTSE 100 stocks to buy.
