The Rolls-Royce (LSE:RR.) share price appears unstoppable. During 18 of the past 24 months, it’s gone up.
And in three of the six months when it fell, it went down by less than 2.5%. Since August 2022, its average monthly increase has been 8.7%.
Those who were brave enough to invest when the share price reached a post-pandemic low have seen a 12-fold increase in the value of their shareholding.
But I suspect the question that shareholders will all be asking themselves is, can this bull run continue? And by implication, what will the share price be at the end of December.
Let’s take a look.
Image source: Getty Images
A crystal ball
Making share price predictions is fraught with difficulties. That’s because history’s sometimes the only tool available, yet it isn’t necessarily a good guide to the future.
If the Rolls-Royce share price were to continue rising by 8.7% a month, it’ll close 2024 at 698p. But this appears to be a little optimistic.
Recently (1 August), the company upgraded its earnings expectations for 2024. It’s now forecasting an underlying operating profit for the year ending 31 December (FY24), of £2.1bn-£2.3bn. And free cash flow (FCF) of £2.1bn-£2.2bn (previously: £1.7bn-£1.9bn).
With many in the City on holiday, few analysts have had time to digest the good news. But JPMorgan quickly upgraded its earnings per share (EPS) forecasts to 18.6p (FY24) and 20.2p (FY25).
The investment bank was particularly impressed with the significant increase in FCF as it’s expected to come from the improvement in profitability, rather than from a greater number of customers paying in advance under long-term contract arrangements, which had been a concern.
Based on a current (21 August) share price of 493p, JPMorgan’s forecast implies a FY24 forward price-to-earnings (P/E) ratio of 26.5. That’s on the high side, especially for a member of the FTSE 100 where the average is currently around half that figure.
However, some investors look at the PEG ratio to assess value for money. If JPMorgan’s prediction’s accurate, 2024 will see a 35% increase in EPS. With a P/E ratio of 26.9, the PEG ratio would be 0.76.
That’s close to 0.7, the level below which a share might be considered something of a bargain.
Illustrious company
But if the stock price was 698p, its earnings multiple would be 37.5. This would be similar to some members of the Magnificent Seven.
Ironically, Rolls-Royce’s share price has been growing like that of a tech giant rather than a company that’s been around since 1906. But I don’t think a valuation at this level’s justified. And given that many investors will be sitting on some handsome paper profits, I’m sure an increasing number will soon be tempted to cash in their gains.
Final thoughts
In my opinion, successful investing’s about taking a long-term view. Looking four months ahead is too short an investment horizon to be meaningful. I’m therefore not going to make any predictions other than to say that I think the pace of growth in the Rolls-Royce share price will soon start to slow.
It might even fall as some investors take a breath. However, another bumper set of results — and an upwards revision in future earnings forecasts — could lead to another bull run.
