The Rolls-Royce (LSE:RR) share price is up 211% over 12 months, doubling several times from its lows in autumn 2022.
But that’s not important to investors today. Now we want to know whether the engineering stock could double in value again.
Is there anything holding Rolls-Royce back?
Rolls-Royce has surprisingly few headwinds at this time. That’s a massive turnaround from a couple of years ago.
Nonetheless, it’s certainly worth considering that, given the huge share price gains, some investors will be looking to take their winnings.
That could be a drag on the share price especially when we combine that with the current valuation metrics.
I’d suggest that for most British investors, Rolls-Royce stock might look a little expensive at 28 times forward earnings. After all, that’s double the FTSE 100 average.
Business is booming
The aforementioned factors could hold the stock back, but business is booming. The appointment of CEO Tufan Erginbilgiç in January 2023 marked a significant turning point for Rolls-Royce.
The new boss implemented a series of strategic measures, including cost-cutting, workforce reductions, and service price adjustments. All of these contribute to a comprehensive transformation plan aimed at achieving ambitious targets by 2027.
By 2027, Rolls-Royce wants to achieve free cash flow of £2.8bn–£3.1bn and an operating profit between £2.5bn and £2.8bn. It targets an operating margin of 13%–15% and a return on capital between 16% and 18%.
Here’s what analysts think that will mean for earnings:
| Earnings per share (¢) | Price-to-earnings | |
| 2024 | 20 | 28 |
| 2025 | 25 | 22.4 |
| 2026 | 25 | 22.4 |
| 2027 | 30 | 18.6 |
How long term are these tailwinds?
The above chart shows Rolls-Royce stock getting cheaper year after year. This is essentially driven by tailwinds across all parts of the business.
Rolls-Royce’s business segments are booming, driven by the long-term recovery in air travel and growth in defence and power systems.
The Civil Aerospace division leads, benefiting from rising travel demand in the post-pandemic world, while technological advancements boost the Defence and Power Systems units.
For me, the question whether the Rolls-Royce share price can double from here is dependent on whether these supportive forces carry on beyond the medium term.
That’s almost an impossible question to answer, although analysis points to positive long-term trends in civil aerospace — the industry demands 40,000 new planes by 2040 — and defence spending.
The bottom line
I don’t expect the Rolls-Royce share price to carry on growing at the rate we’ve seen over the past 12 months. That would be something special.
However, I’m certainly expecting more upward movement over the long run, assuming the company continues to perform in line with the market’s elevated expectations.
Moreover, I wouldn’t write off the share price doubling from here. But there’s no indication it will happen anytime soon.
In my opinion, the metrics indicate the company is moderately undervalued relative to the valuations afforded to other UK stocks.
