Rolls-Royce (LSE:RR) shares are back on the move higher, having popped 13% in the past month. Even though some were sceptical earlier this year (myself included) that the multi-year rally would keep going, clearly positive sentiment continues to prevail. But if we fast-forward to the end of 2027, the picture could look very different.
The positive vision
In the best-case scenario, I think the stock could match the 48% gain over the past year again through to the end of next year. This would put the share price just above 1,900p. Yet the continuation of momentum wouldn’t necessarily come from the same factors that have driven the stock of late.
The biggest reason for optimism I see is the company’s civil aerospace business. Rolls-Royce does not simply sell aircraft engines but rather it operates a long-term service model where airlines pay based on engine usage.
As global air travel continues to recover, more flying hours mean more valuable maintenance revenue. If passenger demand remains resilient, this could help earnings to keep increasing at the same pace as the past few years. In the last full-year results, the civil aerospace division hit an operating margin of 20.5%, so it’s clearly a profitable area.
There is also potential excitement from Rolls-Royce’s defence and power systems divisions. Rising geopolitical tensions have prompted many governments to increase defence spending, as we’re seeing in the UK at the moment. Meanwhile, interest in small modular reactors and energy solutions provides the firm with exposure to long-term themes in energy security. If even part of these opportunities develop as hoped, the shares could have another strong year.
Tempering expectations
On the other hand, after a powerful share price recovery, Rolls-Royce is no longer the deeply undervalued turnaround play it once was. Investors may have already factored in much of the improvement, meaning the company could struggle to impress going forward, even if financial results are strong.
With a price-to-earnings ratio of 44.26, it’s almost three times as expensive as the FTSE 100 average ratio. Ultimately, this could see the share price tread water or even come lower in the coming year to provide a fairer valuation.
The company also remains exposed to the global economy. As we’ve seen from the conflict in the Middle East, airlines are vulnerable right now due to weaker consumer demand and higher fuel costs. If these tensions keep going into 2027, the prolonged slowdown in travel could directly affect Rolls-Royce’s cash flow.
In this scenario, although I don’t see the share price collapsing, I do think it could consolidate around the current price just above 1,300p. Without any positive news to provide a catalyst for a rally, and with the high existing valuation, the stock could just bob along.
The bottom line
When I put it all together, I think the reality is somewhere between the two outcomes. I see it unlikely the pressure on the airline space will continue, but I struggle to see the defence and power systems growing enough to support huge outperformance. On that basis, I think a middle ground between the two estimates is a reasonable assumption for the share price in the coming period, potentially moving to 1,600p. But I could be wrong, of course.
Even though I think there are better opportunities elsewhere, investors could still consider adding this stock to their portfolio.
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Jon Smith has no positions in the shares mentioned
