Could Rolls-Royce Share Price Hit £20 in the Next Decade?
According to an analysis by The Motley Fool UK, shares in Rolls-Royce (LSE: RR) have experienced a remarkable surge in recent years, with the Rolls-Royce share price now sitting above £8. Some investors may be eyeing the possibility of it hitting £10, but one long-term investor is wondering whether the share might yet get to £20 over the coming decade.
To put that into perspective, it would require a rise of around 133% in the Rolls-Royce share price. As The Motley Fool UK notes, that is heady stuff, although the shares have performed stunningly in recent years, with an 820% increase in five years. The current market capitalisation is around £73bn, so if the share count remains the same and the share price hits £20, it would become around £169bn, making Rolls-Royce the most valuable company on the FTSE 100.
However, The Motley Fool UK raises concerns that this prospect makes them pause for thought. Five years ago, Rolls was on its knees, massively diluted, with an uncertain future for its existing shareholders. The Motley Fool UK questions whether such a business could go on to become the country’s biggest in just a few years, noting that the bedrock of investors’ confidence in Rolls’ business does not seem that deep when stepping back and looking at the longer-term picture.
Currently, Rolls-Royce trades on a share price-to-earnings (P/E) ratio of 29, which is exactly in line with fellow UK defence contractor BAE Systems. However, without earnings growth, a £20 share price would imply an even more dizzying P/E ratio of 68, which seems ridiculous to The Motley Fool UK for a mature company in a mature industry.
Rolls-Royce has set out ambitious financial targets, including a medium-term target of £3.6bn-£3.9bn in annual underlying operating profit. The Motley Fool UK notes that if the company achieves the high end of that range, the P/E ratio (using underlying operating profit) would be 43, which is high but not unimaginably so. However, The Motley Fool UK also highlights risks that could impact the company’s earnings, including a weak economy, elevated defence spending in Europe being a fad, and sudden external shocks.
As The Motley Fool UK concludes, "I do not think those risks are properly priced in, even at today’s Rolls-Royce share price, let alone a higher one. So I will not be investing." The Motley Fool UK’s analysis suggests that while Rolls-Royce’s shares have performed well in recent years, there are concerns about the company’s long-term prospects and the risks that could impact its earnings.
The Motley Fool UK’s investment expert, C Ruane, has no position in any of the shares mentioned, and The Motley Fool UK has recommended AstraZeneca Plc, BAE Systems, 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 made by The Motley Fool UK in its subscription services.
In conclusion, while a £20 share price for Rolls-Royce is possible, it would require significant earnings growth and a high P/E ratio. The Motley Fool UK’s analysis highlights the risks and uncertainties associated with investing in Rolls-Royce shares, and investors should carefully consider these factors before making any investment decisions.
