I think the Rolls-Royce share price could hit 200p in the next 12 months

The last time the Rolls-Royce (LSE: RR) share price changed hands for 200p was in March 2020. That was just before the coronavirus pandemic shut down the global economy. 

Since then, shares in the group have traded between 140p and 90p although, at one point, the stock dropped below 39p. 

However, I think there is a growing chance shares in the aerospace giant could return to 200p in the next 12 months. There is one particular catalyst I believe could drive a significant re-rating of the stock.

Rolls-Royce share price outlook

In many ways, this company is both a recovery story and a growth play. Of course, the firm needs the civil aviation industry to return to 2019 levels of activity for earnings to recover.

But on the other hand, its presence in the nuclear sector, particularly the small modular reactor market, makes this company an attractive growth stock for the next decade and beyond. 

Thanks to these potential twin catalysts, I think the outlook for the Rolls-Royce share price is looking up. Unfortunately, it is unlikely the stock will return to pre-pandemic levels unless a significant catalyst emerges that pulls investors back to the business. 

I think this is likely to be the company’s cash generation. What I mean by this is that the business has long been promising it will earn a positive cash flow this year.

If it does, it will remove one of the most considerable question marks hanging over the stock since the beginning of the pandemic. Will Rolls run out of money?

When the enterprise is cash-flow positive, it will be able to stand on its own two feet. This will also free up more money for the enterprise to invest in growth initiatives, such as its nuclear business, and chase new customers. 

Something else investors need to consider is the company’s credit rating.

Market sentiment

When an aircraft manufacturer buys an engine from Rolls, it is doing so on the understanding that the engineer will still be around in five or 10 years time. Every unit is sold with a multi-year service contract. This is where the company makes the real money as each engine is sold at cost.

Buyers of the units need to trust that the corporation will be around to meet its obligations. If they doubt its ability to survive, they may postpone orders or seek out another manufacturer. 

This is why the company’s cash position is so fundamentally crucial for the Rolls-Royce share price. If its customers believe the group is struggling to survive, they might stop placing orders. 

Still, there is no guarantee the organisation will meet its cash targets. Further economic disruption could destabilise the organisation’s return to growth. 

I would acquire the company for my portfolio as a speculative play despite this risk factor. Indeed, I estimate that if the corporation hits its cash flow projections, it could earn an annual free cash flow per share of around 10p in the next couple of years.

In 2019, the stock traded at a multiple of around two times free cash flow. A return to this valuation would justify a price of 200p, or more, an increase of nearly 70% from current levels. 

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.