After a stellar 2023, the Rolls-Royce (LSE:RR) share price is heading higher in 2024. And analysts at Bank of America think it might have further to go.
Estimates for engine flying hours – a key metric for the company – are looking strong and more is expected for the future. If that’s true, the stock could carry on climbing.
Engine flying hours
Around 44% of Rolls-Royce’s revenues come from its civil aerospace division. And the majority of profits in this part of the business are derived from servicing engines, rather than selling them.
This happens on a use basis, so the more time engines spend flying, the more need there is for servicing. So Rolls-Royce shares are – to some extent – a bet on long-term demand for air travel.
Last August, the company reported engine flying hours at 83% of pre-pandemic levels. This boosted operating income from £1.6bn to £2.3bn.
According to Bank of America, this should get back to 87% in the next update before a full recovery in 2024. If this happens, I’d expect profitability to go even higher.
Right now, the stock has a market cap of £25.5bn. Higher earnings would make an already attractive-looking stock look like even more of a bargain.
Economic outlook
If things go the way BofA’s analysts are expecting, I think the Rolls-Royce share price has further to climb. But there are reasons for being cautious about the idea of a full recovery in air travel.
Demand is likely – in my view – to be closely tied to economic growth and consumer strength. And the recent data from this hasn’t been hugely encouraging.
In both the US and the UK, consumer spending has been fairly strong. But credit card debt has been climbing and this is obviously not something that can go on indefinitely.
On top of this, a number of companies have issued trading reports that give me concerns about the economic outlook in the near future. These include Nike, FedEx and Burberry.
I’m not saying flight hours won’t get back to the pre-pandemic levels. But the idea that a full recovery is due in 2024 seems optimistic to me, given what I’m seeing elsewhere at the moment.
Investment equation
Increasing engine flying hours has been the main reason the Rolls-Royce share price is up so much from where it was. So the idea this could continue is a reason to believe the stock might keep going.
I’m sceptical of this, though. I think sustained growth in the number of flying hours depends on a strong underlying economy and the signs I’m seeing elsewhere aren’t encouraging for this.
Nonetheless, I don’t think the current share price reflects an expectation of a full recovery in 2024. At a price-to-earnings (P/E) ratio of around 15, the stock looks like reasonably good value to me.
I’m therefore considering buying Rolls-Royce shares, but not on the basis of increased flying hours this year. The long-term prospects for the business are where I think investors should be focused.
The post Why the Rolls-Royce share price could keep going higher appeared first on The Motley Fool UK.
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More reading
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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Burberry Group Plc, Nike, and Rolls-Royce Plc. 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.
