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The Rolls-Royce (LSE: RR.) share price has risen 943% in the last five years. So how much could it rise in the next five?
Let’s drum up a few possibilities, going by the latest data and news coming out of the firm. Here are three predictions where the current £14.88 share price could be in 2031 (from most bearish to most bullish).
Growth avenues?
In the most pessimistic case, the valuation might come under some pressure. Why? Because the Rolls-Royce share price currently trades at a hefty premium. Years of revenue growth and earnings beats have made the shares command a price-to-earnings (P/E) ratio of 41. Would-be investors are paying more per pound of profit than almost anything other stock on the FTSE 100.
In the bear case then, let’s assume that earnings level off and the valuation drops to the Footsie average. This isn’t an unthinkable scenario, especially if growth avenues like small modular reactors or entry into narrow-body plane engines turn out to be more like cul-de-sacs.
In this case, the Rolls-Royce share price could end up at £7 in 2031 with investors are down 53%. Note this isn’t the worst-case scenario.
A second scenario to consider is performance in line with the average. There are a few ways to calculate this. I’ll go with historical FTSE 100 performance – seeing as Rolls-Royce is a member of London’s leading index. The average FTSE 100 performance over five-year periods (analysing data from 1984-2019) is an annualised 8.92%.
Should Rolls-Royce achieve average Footsie returns for the next five years, then the share price would be £22.81 in 2031. That would be decent, if modest, growth but it’s certainly nothing to write home about. Let’s move on to the more exciting proposal.
Worth it?
What about our third eventuality… the optimistic scenario… the bull case? I think the outcome here is to explore if Rolls-Royce can continue growing earnings at a speedy clip.
The jaw-dropping increase in profits of recent years is unlikely to be repeated, but continuing the forecast earnings growth in the years ahead seems possible. The rise could be maintained given the firm’s exposure to artificial intelligence (through Power Systems) and increases in military spending (through its Defence division).
Using these numbers, the Rolls-Royce share price would reach £30.51 in 2031. That’s an annualised 15.5% a year gain. Not bad.
Eagle-eyed observers will notice that it’s lower than the pace the firm’s been setting. But the £120bn manufacturer is a huge enterprise now – the fifth biggest firm on the FTSE 100 by market value. Lightening-fast growth is a lot less likely, but I still think it could be a good investment and is worth considering.
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John Fieldsend owns shares in Rolls-Royce.
This story originally appeared on Motley Fool
