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What are the Rolls-Royce Holdings (LSE: RR.) share price headlines saying? Some ask when the price will break through the £10 level. Others fear a possible crash.
The shares have fallen back from the all-time high they reached on the last day of June. They came within a penny of it again on 7 July, but that £10 looks a bit elusive just now.
An arbitrary price doesn’t actually mean much really. If Rolls-Royce did a three-for-one stock split tomorrow, would we still be excited about the shares breaking £3.33p? I doubt it — but we investors do seem to like numbers that tie in with how many fingers we have.
To get some idea of which way things might go next, let’s see what City analysts are thinking. Their average price target stands at around 890p, and that’s… 8% below the current price. Despite that, the great majority of brokers still have Rolls as a Buy.
One thing could be skewing the average. The low-end target of 240p is presumably from the lone broker who has the stock as a Sell. Without that, maybe the average would justify the overall Buy stance.
Looking a bit rich
I think it’s probably best to just ignore where tipsters think a share price is going. Imagine we didn’t have any record of past Rolls-Royce share prices or future targets. What would we do then?
We’d have to make our decisions without the benefit of… possibly the least informative piece of stock market information there is. The share price as a standalone figure is useless for investment decisions. And I reckon the elimination of all published share price charts could actually make us all better long-term investors.
A share price is important only in relation to fundamental valuation measures. One of those is the price-to-earnings (P/E) ratio, and Rolls shares currently trade at 40 times forecast earnings. Considering the long-term average FTSE 100 multiple is around 15, that’s not screaming cheap. In fact, it’s too rich for me as I only buy shares where I think I see a safety margin.
Might go higher
On the other hand, forecasters predict a rise in earnings per share of close to 10% over the next three years. And they expect Rolls to end the 2027 fiscal year with £6.8bn net cash on the books. That’s up from £475m at the end of 2024.
It all points to a strongly cash-generative company, which might even start getting into proper dividend territory. The 2027 forecast would put the dividend yield at 1%, so there’s still some way to go, mind.
Rolls-Royce’s dominant position in the aero engine business could keep it on high stock valuations for quite some time. The greater its market share, the more it can lock in long-term income from service and maintenance contracts. And that could make the risk lower than it might seem on first examination.
It’s still not one for me. But growth investors who don’t think we’ll see a share price decline might just be right.
This story originally appeared on Motley Fool
