It has been an incredible year for the Rolls-Royce (LSE: RR.) share price. In the last 12 months, it has risen by a staggering 140.9%.
But with the stock now sitting at £5.22, what’s next for the FTSE 100 stalwart? It seems like Rolls is unable to slow down at the moment. But surely its share price can’t just keep rising?
Exciting times ahead?
Well, to answer that, it’s worth looking at what has boosted the stock in recent times. The latest reason is that Rolls was chosen by CEZ Group, the Czech state utility company, as the preferred choice for its small modular reactor (SMR) programme. The British icon secured the deal over six competitors who were also vying for the contract.
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That’s exciting. For years, investors have been bullish on Rolls’ SMR business’s potential. Now, it seems we’re finally seeing its potential to fruition.
Overvalued?
But while that’s all well and good, where does this leave Rolls stock today? Essentially, I’m intrigued to see if there’s any room for future growth.
There are multiple ways to answer that question. Let’s start by using the key price-to-earnings (P/E) ratio.
Rolls currently trades on a P/E of 19.1. That’s above the FTSE 100 average of 11. Looking ahead, its forward P/E rises to 31. For comparison, competitor BAE Systems trades on a P/E of 20.4 and a forward P/E of 16.7.
I can also look at its price-to-sales (P/S) ratio. Rolls’ current P/S is 2.5. BAE Systems is 1.6.
Double-digit rise?
Based on the above, it could be argued that Rolls shares are overvalued. But there are other ways to see what the stock could potentially do in the times ahead. One is looking at analyst forecasts.
These must be taken with a pinch of salt. They can be wrong. However, I think they’re a good guide.
Fourteen analysts offering a 12-month target price for Rolls have an average price of £5.81. That’s an 11.3% premium from its current price.
Strength to strength
So, even after soaring, experts think the stock has more to give. In all fairness, I can see why.
The business has posted a brilliant turnaround from where it was during the pandemic. Under CEO Tufan Erginbilgic, the firm has gone from near bankruptcy to posting impressive growth.
Since taking over last year, profits have rocketed. In its most recent update, Rolls posted an operating profit of £1.1bn. That’s 74% higher than from the same period the year prior. The firm is targeting an operating profit of up to £2.8bn by 2027.
If it achieves that, I think we could see its share price continue its fine form. But of course, it’ll face challenges along the way. For example, supply chain issues could prove to be an issue. In its update, it revealed that it expects up to a £200m cash impact to these issues on its free cash flow for this year. It also stated these issues will likely continue in the next two years.
One I like
But I’m a fan of Rolls and the trajectory the business is on. While it may look expensive, I’m fine paying for quality. I’m hoping to have some investable cash this month, so I’ll be picking up some shares.
