Rolls-Royce (LSE: RR) shares have continued to charge ahead in 2024. Anyone buying the FTSE 100-listed engineer at the beginning of January would be looking at a gain of 80%. And those who bought during the dark days of the pandemic would have multiplied their cash many times over by now.
With the stock changing hands for 538p at Friday’s (1 November) close, I can think of a few reasons why the price might hit 600p before Christmas.
Outstanding numbers
Perhaps most importantly, a trading update is due on 7 November.
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No doubt investors will be poring over the details, checking to see that CEO Tufan Erginbilgiç is continuing to work his brand of no-nonsense magic that has helped the company bounce back in style.
August’s thumpingly-good interim results certainly bode well. Back then, the company estimated full-year underlying operating profit of up to £2.3bn. This was way ahead of what the market was expecting. It also raised its free cash flow projection to £2.1bn-£2.2bn and signalled that dividends would be re-started.
The shares jumped 11% on the day. Any improvement on those numbers this Thursday and I can see something similar happening.
But there are other, more general reasons why the Rolls-Royce share price could keep climbing.
With the Budget now done and dusted (and maybe less horrific than feared), some UK investors may feel comfortable putting their money to work in the market again. The likelihood of this surely increases if, as rumoured, the Bank of England cuts interest rates again this week. This would making hoarding cash less attractive.
An early Santa rally? I wouldn’t bet against it!
Too expensive?
That said, my biggest concern is the valuation — it has a price-to-earnings (P/E) ratio of 26 for FY25 (beginning in January).
Analysts’ projections should usually be taken with a pinch of salt. Even so, that looks pretty frothy to me. It implies that Rolls-Royce will need to hit all of its targets going forward.
That might be asking for too much. Just as it only takes a small chink of light for sentiment in a thoroughly-hated stock to reverse, it also only takes a small earnings wobble or similar for sentiment in a thoroughly-loved stock to tumble.
And Rolls hasn’t exactly been out of the headlines in recent months.
In September, the European Union Aviation Safety Agency (EASA) ordered checks to be carried out on a number of engines made by the company after one caught fire on a Cathay Pacific plane. In October, British Airways said it was compelled to make changes to its schedule due to delays in receiving engines and parts from its owner’s FTSE 100 peer.
So far, the market seems to have brushed off these developments. But another setback could be one too many for some.
Better value
Taking the above into account, I believe there’s a fair chance the stock might zoom through the 600p barrier in the next few weeks. This is assuming there are no unexpected nasties in that trading update.
Then again, I also reckon that an awful lot of good news is now priced in and that there’s more value to be had elsewhere in the market.
I’ll be watching, with interest, from the sidelines.
