After the Rolls-Royce Holdings (LSE: RR.) share price has trebled in the past 12 months, I keep thinking it looks like one to buy on the dips.
Now it’s down 8% from June’s 52-week high, I wonder if this could be one of those opportunities.
The shares are still up 49% so far in 2024, and I need to be cautious. So, where might things be in another five years?
Big changes
It’s clear from the above chart that the Rolls share price is still way down from where it was before Covid and before the 2020 stock market crash.
So maybe we should just assume that, when the recovery is done, it’ll be back up there. But that’s a mistake I’ve seen investors make a good few times.
The thing is, Rolls-Royce is a very different company to what it was back then. So we need to forget the past and make our decisions based on where we are today.
The positive side of that, though, is that Rolls looks like a better company in a number of ways. Mainly, it’s leaner and better focused now. The pre-crash Rolls carried some fat that it needed to get rid of.
What comes next?
Forecasts don’t look forward very far, just to this year and the next two. But they do look good.
They show earnings rising strongly from 2025. And, in what I rate as a key measure, we should see the firm’s operating margin rising from 2023’s 10.3% to 13.3% by 2026.
These forecasts also show earnings per share (EPS) growing by 40% between 2024 and 2026. Beyond that, all we can do is guess. But I don’t mind a bit of guesswork.
If the aviation business continues its recovery, I could see maybe a further 10% per year EPS growth for the following three years. The global strife we see now it awful but should provide a defence boost, on top of any upturn in civil aviation.
The share price
So, that could mean EPS of around 27.5p by 2029. And, if the Rolls share price doesn’t move between now and then, the price-to-earnings (P/E) ratio could drop to 16.
Now, that’s close to the long-term average for the FTSE 100, which is around 15. So does it mean that all of the next five years of potential earnings growth is already priced into the current price?
It does rather look like it. Unless investors expect faster earnings growth than I’m guessing at. Or they think growth forecasts beyond 2029 will keep motoring ahead. They might well be right.
Valuation
Rolls-Royce under the leadership of Tufan Erginbilgic has been super-impressive. If he can keep it going, the shares might still be a bargain buy at today’s valuation.
But it does look to me as if Rolls is valued for maximum optimism. And I’ve always seen that as a risky way to invest.
So for me, this isn’t the buying opportunity I’d hoped for. But my eyes are open for further dips.
This post was originally published on Motley Fool
