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Could this send the Rolls-Royce share price flying higher?

This Fool takes a look at the catalyst that he thinks could drive the Rolls-Royce share price higher over the next 12 months. The post...
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The Rolls-Royce (LSE: RR) share price has been facing multiple headwinds over the past couple of years. The latest is the war in Ukraine. Shares in the company plunged soon after the war began. As of yet, it is not entirely clear how much of an impact the war will have on the group. It is likely that the business will take a hit both from leaving Russia and due to rising commodity prices. 

However, while the situation in Eastern Europe is concerning, I am focusing on the firm’s growth potential over the next 12 months. In fact, I think that if the business does return to growth, the Rolls-Royce share price could take off

The company’s outlook 

When I say I am looking forward to the company’s return to growth, I mean I am looking forward to the group’s return to sustainable profitability. 

For the past two years, the firm has been pulling through the coronavirus crisis. During this time, management has had to pull out all the stops to keep the business alive. At times, it has been touch and go. 

But now management thinks the business is back on a sustainable footing. Unfortunately, I do not think the market shares the same viewpoint. It is easy to understand why. Rolls has disappointed the market many times in the past. 

And there are a number of reasons why the firm could miss management’s projections for the year ahead. Rising commodity prices, rising labour costs and economic uncertainty are all factors that could weigh on Rolls’ outlook. 

Still, I think that overall the company is heading for a much-improved performance this year. If it does return to growth, I think the Rolls-Royce share price could take off. 

Rolls-Royce share price outlook

At this point, it is challenging for me to place a price target on the stock for the next 12 months. 

Nevertheless, with City analysts projecting earnings per share of around 6p for the year ahead, it is possible for me to place an estimate on what the business could be worth. Assuming a sector-average price-to-earnings (P/E) multiple of 20, the stock could trade as high as 120p. The City’s figures are based on the company’s own numbers. 

I should caution that this is only a rough estimate. However, I think it supports my thesis that the stock could take off if the business meets its own growth projections over the next couple of months.  

All in all, while there are plenty of reasons why the stock could struggle over the next year or so, I think the outlook for Rolls is improving. That is why I would be happy to buy the shares as a speculative holding in my portfolio. As the business continues to recover from the pandemic, I reckon the market should begin to re-rate the stock to a higher earnings multiple. 

The post Could this send the Rolls-Royce share price flying higher? appeared first on The Motley Fool UK.

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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.





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