I keep thinking the Rolls-Royce Holdings (LSE: RR.) share price climb must end soon, but it hasn’t yet.
It did seem to falter a bit in April. But it’s on the way up again, and it’s now not far off an all-time high. The price has soared more than five-fold since late 2022.
What happens next?
When I talk to people about Rolls-Royce shares, I seem to mostly get one of two polarised opinions. Some reckon the growth stock will keep on going up and up. But others see a bubble just waiting to burst.
Strangely, I don’t really hear folk who think the price is about right, and will stay around the mid-£4-ish range this year.
It seems people expect a climb above 500p, or a crash back below 400p. Which way might it go? I’m torn, but I can see arguments for both views.
The bull case
The company’s own bullishness has surely helped drive the Rolls-Royce share price up, and it could simply carry on. In FY results, CEO Tufan Erginbilgiç spoke of “a record performance in 2023.” And he enthused: “We are unlocking our full potential as a high-performing, competitive, resilient, and growing Rolls-Royce.“
The company has ambitious targets for profit, margins, cash flow and return on capital in the years between now and 2027.
Broker forecasts back it up too, suggesting free cash flow could more than double by 2026. If it all comes off, the Rolls-Royce price-to-earnings (P/E) ratio could drop from a mooted 30 this year, to 21 in 2026.
For a company with further growth prospects, that could still be cheap.
The bear case
In the past year or so, stock market sentiment has been weird. Investors have jumped on story stocks like Rolls-Royce and have ignored top dividend stock on super-cheap prices.
And right now, we see more big dividend stocks in the FTSE 250, and stocks on growth valuations in the FTSE 100. Might a return to long-term normality move people in the more conventional direction this year?
Something else that can derail a growth stock is a failure to hit targets. Or, when the bull fever is full on, even simply failing to beat targets can cause havoc.
It’s happened many times in the past. And Rolls-Royce’s medium-term goals are, we must remember, pretty lofty.
Verdict
The Rolls-Royce recovery has exceeded my wildest guesses, and I’m amazed how well it’s getting its big debt pile down. For me, this is a quality company, in leaner and better shape than it was even before the Covid crash. And it’s very well managed. I suspect that, in the decades ahead, it could reward investors very nicely.
But by the end of this year? I reckon there are good chances it could exceed either end of the range I’ve suggested here.
But I think I’d rate the chance of the Rolls-Royce share price just going sideways all year as fairly slim.
This post was originally published on Motley Fool
