Will Rolls-Royce (LSE:RR) shares hit £3 before Christmas? I posed this very question to myself a few weeks ago, but without any earnings data due, I didn’t think it would happen so soon.
Now, I’m not so sure. Rolls-Royce shares have rallied further, reaching £2.85, partially driven by the unveiling of its medium-term targets, and several brokerage upgrades. It’s now up 214% over 12 months.
More positivity
On 4 December, JP Morgan upgraded its rating for the aerospace engineer from ‘neutral’ to ‘overweight’ and hiked its target price for the stock from 235p to 400p.
The bank said this was because of “radical moves” made by Rolls-Royce’s chief executive Tufan Erginbilgiç, who joined in January 2023, like raising the price the company charges for its long-term service agreements.
The bank also pointed to a £400m–£500m cost reduction programme announced last month that changed analysts’ minds.
This followed the unveiling of Rolls-Royce’s mid-term targets on 28 November, which included the goal of achieving an operating profit within the range of £2.5bn–£2.8bn by 2027.
Profit targets are to be achieved, according to Rolls, by margin improvements. In civil aerospace, Rolls wants to see operating margins improve from 2.5% in 2022 to a range of 15%–17% by 2027.
In defence, the aim is to improve from 11.8% in 2022 to 14%–16% in 2027, And finally, in power systems, the target is to push operating margins from 8.4% in 2022 to 12%–14% in 2027.
These improved metrics are also being driven by a host of positive influences, including geopolitical tensions and strong demand for travel.
However, the business is still heavily reliant on the civil aviation industry. A respiratory illness is circling around China again, and viruses are raging across the UK. If we were to see another pandemic-like shock, it could be a huge challenges for the business.
Equally, it’s positive that the biggest risk to the business is hopefully unlikely.
Momentum
Momentum is an important commodity when investing, and one that’s not easy to come by. Below, we can see momentum in Rolls-Royce shares as highlighted by the moving average convergence divergence (MACD) metric. This compares short-term and long-term moving averages, and provides us with an idea of momentum.
Created at TradingView: 3-month MACD
Long-term growth
There are two things that excite me about Rolls-Royce. And they’re both related to growth.
Firstly, Rolls-Royce has a price-to-earnings-to-growth (PEG) ratio of 0.52. This is an earnings metric adjusted for growth, and it suggests that Rolls-Royce’s share price is potentially undervalued by as much as half.
The metric is calculated using the expected growth rate over the coming five years, so there’s room for error, but it is certainly very attractive. In fact, the PEG ratio infers a fair value around £5.70.
Looking beyond that, we can also expect strong demand for air travel over the next two decades. Boeing anticipates that 42,000 aircraft will enter the global fleet by 2040, suggesting the need for at least 84,000 engines.
The only issue is most of the demand is for narrow-body jets, and not the wide-body jets that use Rolls’s engines. The British engineering giant has suggested it could shift its product offering in the coming years.
The post Up 214%, will Rolls-Royce shares hit £3 before Christmas? appeared first on The Motley Fool UK.
Pound coins for sale — 51 pence?
This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()
More reading
Should I buy Rolls-Royce shares for 2024 as brokers raise their price targets to £4?
Hargreaves Lansdown investors are buying these FTSE 100 value stocks! Should I?
Is the Rolls-Royce share price horribly overvalued?
Could Rolls-Royce retain its share price gain and more?
If my Dad had invested £500 in Rolls-Royce shares when I was born, here’s what I’d have now
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. James Fox has positions in Rolls-Royce Holdings plc. 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.
