The Rolls-Royce (LSE:RR.) share price is on a rampage. Following a surprise quick turnaround, the engineering giant has seen its valuation skyrocket on the back of surging free cash flow and earnings. As such, despite being on the brink of bankruptcy a few years ago, the stock’s trading at an all-time high.
But after enjoying more than a 150% return over the last 12 months, can these shares continue climbing? Here are the latest analyst predictions.
The numbers
According to the data from LSEG, there are currently 18 institutional analysts watching Rolls-Royce shares, each with different opinions and price points. However, the overall consensus appears to be rather positive, with just one Sell recommendation.
| Recommendation | Strong Sell | Sell | Hold | Outperform | Buy |
| Analysts | 0 | 1 | 4 | 10 | 3 |
There’s always usually a broad range of opinions from City analysts. However, with three quarters leaning towards optimism, it certainly seems to be a strong indicator of outperformance over the next 12 months. And that’s also reflected in some of the share price forecasts.
The most optimistic outlook for Rolls-Royce is a 675p price target. Compared to the current share price, that suggests a potential upside of almost 30% by this time next year. However, the most pessimistic expectation is 240p – roughly half of current trading levels.
Taking an average of all analyst predictions, we can see that the estimated target is 552.50p, slightly higher than where Rolls-Royce shares are currently trading.
Digging deeper
Given the broad range of price points, what’s driving the contrast in share price predictions?
Let’s start with the more optimistic opinions. As previously mentioned, management has achieved some impressive milestones in their efforts to get the business back on track. Disposals paired with cost-cutting initiatives have enabled free cash flow to surge. In turn, that’s given leadership some valuable financial flexibility to start repairing the cracks in the balance sheet as well as employee pension schemes.
The recovery of the travel sector’s also proven to be a handy tailwind to help its aerospace segment get back on track after the pandemic. And with promising small modular nuclear reactor research on track for delivery before the end of the decade, the company appears to have a bright future.
However, it seems not everyone’s convinced. While the firm’s credit rating has recently received an upgrade, debt remains a problem yet to be solved, with interest payments gobbling up a large chunk of operating profits. Yet, if the group continues to perform as it has done, this issue will likely be resolved. So why are five analysts unconvinced about buying Rolls-Royce shares right now?
One likely explanation is the valuation. At a price-to-earnings ratio of 19, the company’s trading at quite a premium built on future expectations. And should the business fail to keep up, some downward volatility’s likely to follow.
Don’t forget, a lot of the recent growth has been piggybacking off the rebound within the travel industry – a tailwind that’s since stopped blowing. If management can’t maintain momentum moving forward, then Rolls-Royce shares may struggle to reach the 675p price target.
This post was originally published on Motley Fool
