Transatlantic flights aren’t the only aviation fixtures rising with renewed vigour in London this week. Shares in Rolls-Royce (LSE: RR) hit £1.50 today, before falling back in later trading. That’s the highest the Rolls-Royce share price has been in the past year, during which time it has increased by 47% (as of earlier today).
Can Rolls-Royce shares now add more power and reach £2? I think the answer is yes. Here’s why.
Positive momentum
I’m not surprised that the share price hit £1.50 today. Back in August, I explained why I thought the company’s shares could hit that price. In less than three months, the shares climbed 36% to reach the £1.50 mark today.
But while I was right that the shares could reach that level, in August I also said that I didn’t see any specific short-term price drivers for such a rapid increase. Arguably there have been some unforeseen factors: this week, the company announced that it completed the sale of its civil nuclear instrumental and control business as well as securing funding for its small modular reactor business. Despite these, I still think the climb back to £1.50 has been surprisingly fast.
So, if the company later releases more good news — such as hitting its free cash flow target in the current half — could it keep heading north to £2? I think so.
Is a £2 Rolls-Royce share price possible?
I have already explained why I think a £2 Rolls-Royce share price could be on the cards in 2022, if not sooner.
I am even more of that opinion now that the shares have broached the £1.50 level. There are several reasons for that.
First, the latest disposals news reiterates that company management is getting on with delivering against the strategy it set out to help the company recover. That included an ambitious target for disposals. It also included the expectation of turning free cash flow positive, which would reduce the liquidity risks the company faces.
Secondly, the recent share price action suggests to me that there is increasing positive investor momentum behind the shares. That positive sentiment could help further boost them in the stock market.
When could Rolls-Royce shares hit £2?
While I reckon the shares could get to £2, the question of timing is less clear.
When the company announces its full-year results – likely next Spring – we’ll learn what progress it has made on free cash flow and business recovery more generally. In the run-up to those results and after they are announced, good news could see the Rolls-Royce share price climb.
But that is not guaranteed – and if the news is disappointing, the share price could fall. Rolls-Royce has form in disappointing shareholders and risks remain. Cash-strapped airlines may bargain harder for engines, reducing profits. Further lockdowns in some markets could also reduce demand, hurting revenues and profits. Nonetheless, I wouldn’t be surprised to see the share price break the £2 barrier in 2022 or before.
Christopher Ruane 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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