Another quarter, another barnstormer of a performance update from Rolls-Royce (LSE: RR) shares. On 30 July, the company reported excellent numbers across the board. Margins, net cash balance, and revenue increased. Outlook for operating profit and free cash flow was upgraded too. Perhaps the headline figure was the 46% jump in underlying operating profit! Not too shabby.
The strength of the update has got a lot of investors wondering where the share price will head to next. After dipping below the £1 mark following the pandemic, the near-£15 share price has already earned many plaudits. How long will it be until the firm soars past the next big milestone – the £20 mark?
A 33% jump
From its current £15.49 share price to the big £20 mark is a whopping 29% difference. Quite the jump, isn’t it? Many stocks can take years to grow that amount, although it must be said Rolls-Royce has made a habit of doing it quite quickly of late. The stock has made two separate 30%-plus jumps in the last year alone.
The impact of share buybacks cannot be understated either. Rolls-Royce is spending billions buying back its own shares. Reducing the number in circulation bumps up the price of each individual share through simple supply and demand – that’s how it works in theory at least.
An increase in earnings growth would also put the afterburners on the share price. Is it likely for a £122bn market cap company to increase profits by double digits within the next year? Not for any normal company, but Rolls-Royce has been anything but normal in the last few years.
Fall coming?
Another way to look at this is from the analysts’ expectations. Not a single analyst has a price forecast above £20 for the next 12 months, suggesting they are not expecting the mark to be hit in the next year. Although, it should be said, analysts tend to be conservative in their predictions.
It’s worth saying that, like all firms, Rolls-Royce has risks that could see the share price fall, too. One reason the stock is a hot property is the promise of SMRs – a type of small nuclear power plant that could provide the clean and cheap energy the world needs. The problem? Not one has been built yet. If this unproven technology fails to live up to expectations, then the £20 share price might seem a long way away.
On a personal note, I’ve held the shares since around the £1 mark and have read many accounts of reasons the Rolls-Royce share price has run out of gas. That’s no guarantee that the £20 mark is coming soon, but I will be, as they say, letting this particular winner run. I think it could be worth considering too.
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John Fieldsend owns shares in Rolls-Royce.
This story originally appeared on Motley Fool
