Rolls-Royce (LSE:RR.) shares have had a phenomenal run in recent years. Under new leadership and after a radical restructuring, the group’s gone from cash burner to money printer, and investors have been richly rewarded along the way with 1,000%+ gains in just three years.
But is this just the beginning?
More growth to come?
Looking at the latest institutional forecasts, Rolls-Royce’s rocketing rise may still have yet more room to climb. Jefferies has just recently issued a 1,530p share price target, while JP Morgan is close behind with a 1,500p price point of its own.
Compared to where the engineering giant’s trading today, these projections suggest a potential return of anywhere between 28.9% and 34% in the next 12 months. And in terms of money, that’s enough to turn £1,000 in up to £1,314 by this time next year.
So what’s driving this optimistic outlook?
In the last few years, Rolls-Royce has rebuilt its business around stronger margins, tighter cost control, and much more reliable cash generation.
Its civil aerospace franchise is benefiting from a growing services business, which tends to be more stable and profitable than selling engines alone. And with the additional tailwinds of rising defence spending, as well as promising small modular reactor nuclear technology, the company appears to be well positioned for sustained profitable growth.
Having said that, not all analysts are on the same page.
Not everyone agrees
As a bit of an outlier, the team at Berenberg has now issued a Hold recommendation with a more cautious share price target of 1,270p.
That’s still a little higher than where Rolls-Royce shares trade today. But it nonetheless suggests that the growth trajectory expected by other analysts may be a bit overblown. And this caution isn’t entirely unjustified.
Rolls-Royce is still exposed to the cyclical nature of the aviation sector, where flight hours are constantly in flux and demand for new engines is lumpy.
Even with a more cash-generative business model, the company isn’t immune to such cyclical shifts or supply chain disruptions. And with the conflict in Iran still unresolved, such disruptions could lie right around the corner, potentially putting the brakes on Rolls-Royce’s current momentum.
So where does this all leave investors today?
The bottom line
In my opinion, Rolls-Royce looks superb as a business. The turnaround’s real, the cash generation’s improved dramatically, and all three segments (Civil Aerospace, Defence, Power Systems) have a long road of growth opportunities ahead.
However, as a stock, the case is less clear-cut. With a lot of this expected future growth already priced in, I believe there are better opportunities for investors to explore elsewhere within this sector. And I’ve already spotted a more promising aerospace share from within the FTSE 100.
Should you invest £5,000 in Rolls-Royce Plc right now?
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Zaven Boyrazian does not hold any positions in the companies mentioned.
