Back in January I wrote: “I actually think Rolls-Royce (LSE: RR) shares could yet go higher from here, including potentially hitting the £8 mark.” Already, they are tantalisingly close. Yesterday (4 March), they came within just a couple of pence of £8.
Could they keep going — and get to £9?
A trio of price boosters
Despite a storming performance both last year and the year before, the Rolls-Royce share price is already up by a third so far this year – and we are only in the first week of March!
That is no coincidence. For one thing, the engineer recently unveiled strong results for last year, bringing back its dividend after a gap of some years.
It also increased its already aggressive medium-term targets, having hit some previous ones two years early. Meanwhile, an increased focus on defence in European governments has sent up multiple shares with exposure to the sector, including Rolls.
Things might get even better
What strikes me about those drivers for the recent surge to an all-time high in for Rolls-Royce shares is that each (or even all) of them could happen again in the coming year.
Rolls could deliver another set of excellent results for this year. In fact, I think it needs to. City expectations are now high and if Rolls does not deliver on them, I reckon the share price could crater.
Having twice now rolled out ambitious targets and seen investors rub their hands with glee (sending the shares up), current management will realise that at some point they could do the same again.
The thing about a medium-term target (let alone a long-term one) is that it can be announced before all of the details may have been figured out when it comes to delivering it.
As for defence spending, the sky is the limit. I could well foresee a situation where governments in Europe – and potentially elsewhere – ratchet up their spending exponentially. Not only could that lead to higher demand but it would also be a sellers’ market. If you are an airforce looking for specialist bits of kit, there are not that many suppliers you can call.
I’ve missed out massively: what should I do now?
I have to admit, the surging price of Rolls-Royce shares in the past couple of years has impressed me for a mature blue-chip industrial manufacturer.
It has also caught me somewhat off guard. Like I said above, I saw an argument for the price moving up to £8, just as I had consistently recognised a bull case for the share in the past several years. It has specialist expertise, a large installed customer base, legendary brand and lots of unique technology.
I think the share could hit £9 – or higher. But I know I could be wrong. And I am still hanging back, watching rather than adding Rolls to my portfolio. Why would I do that, given that I see further potential here? It is all about risk management.
Rolls trades on a price-to-earnings ratio of 26. That is not cheap in my book and arguably is expensive. It also offers me far too little margin of safety if demand for air engine sales and servicing suddenly falls off a cliff once more, for reasons outside its control. That happens.
This post was originally published on Motley Fool
