The Rolls-Royce (LSE:RR) share price has surged almost 90% over the past 12 months, propelling the engineering giant to a market capitalisation of £65bn. This represents an extraordinary increase of over 800% compared to just a few years ago. It also highlights the transformative impact of CEO Tufan Erginbilgiç’s leadership since his appointment in 2023.
With European defence spending on the rise and operational efficiencies driving profitability, Rolls-Royce has re-established itself as a high-performing aerospace and defence leader. But can its share price continue climbing towards £10?
A turnaround story
Rolls-Royce’s remarkable recovery has been fuelled by a combination of operational improvements and favourable market conditions. The company’s 2024 results exceeded expectations, with revenues reaching £17.9bn. Meanwhile, operating profits surged to £2.5bn, and free cash flow doubled to £2.4bn. These figures marked a significant turnaround from the challenges faced during the pandemic years when Rolls-Royce struggled under heavy debt and declining demand for its civil aerospace products.
The reinstatement of dividends and a surprise £1bn share buyback further boosted investor confidence. Moreover, upgraded mid-term targets suggest sustained growth ahead. Management now anticipates free cash flow of £4.2bn–£4.5bn by 2028, alongside operating margins rising to as high as 17%. These developments have positioned Rolls-Royce as a financially strong, cash-rich enterprise with a net cash balance of £475m.
Can Rolls-Royce reach £10?
Despite its impressive performance, the Rolls-Royce share price currently trades at around £7.50, with analysts offering mixed predictions about its future trajectory. The average target price stands at 798p. This represents a modest 6% potential appreciation. While more optimistic forecasts suggest it could climb as high as £11.50.
However, the valuation raises concerns. On a forward price-to-earnings (P/E) basis, Rolls-Royce trades at 30.3 times projected earnings for 2025. That’s a discount compared to peers like GE Aerospace, which is expected to trade at a P/E ratio of 36.7 times in 2025 and decline further to 24.5 times by 2028. Of course, the difference is that GE is US listed, and these American stocks typically trade with a premium to their UK-listed counterparts.
Risks to consider
Investing in Rolls-Royce isn’t without risks. Supply chain disruptions remain a significant concern for aerospace businesses, particularly given geopolitical tensions in Eastern Europe. Any escalation could impact production schedules or increase costs, undermining profitability.
Additionally, while European governments have pledged increased defence spending, there’s no guarantee these commitments will materialise fully or benefit Rolls-Royce directly. Moreover, with such high expectations baked into its valuation, even minor setbacks could trigger sharp declines in the share price.
The bottom line
Personally, I’d suggest the current valuation is fair given the earnings forecast. However, the company keeps delivering earnings beats and has benefited from catalyst after catalyst. It’s got momentum, and it’s on a roll.
I don’t think there’s evidence that the company should be trading much higher than it is today, but if the business continues to execute, £10 a share seems entirely feasible in the medium term. But I’m probably not going to add more shares to my portfolio. It’s near fair value for now, and concentration risk’s an issue.
This post was originally published on Motley Fool
