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Here’s Rolls-Royce’s stock growth forecast until 2026!

Posted on by darion

Image source: Getty Images

Rolls-Royce‘S (LSE:RR.) , the company’s earnings have soared since the beginning of the pandemic, sending its shares soaring. At 526p FTSE100 In the last three years alone, the engineer’s share price has increased by almost 290%.

If City’s forecasts are correct, profits will continue to grow strongly, at least for the next few years. This could create the basis for further significant growth in share prices.

The big question, of course, is how realistic these earnings estimates are. It is not unusual for corporate earnings to significantly exceed or fall short of analyst forecasts.

So what are Footsie’s growth prospects? And should I buy Rolls-Royce shares for my portfolio?

Case for

Rolls’ earnings recovery was driven by a post-pandemic recovery in the civil aviation sector. Pent-up travel demand continues to drive airfare sales long after Covid-19-related fleet groundings end.

This is significant given the company’s role as one of the largest aircraft engine suppliers in the world. The company generates approximately half of its revenues from, among others, servicing the power units of large aircraft.

But Rolls’ rebound is also partly due to strength elsewhere. While Civil Aerospace sales increased 27% in the first half of 2024, Defense revenues increased 18%, reflecting strength in the air combat and submarine segments.

It is encouraging that the prospects for both the civil and defense markets remain good in the near and long term. Here you can see forecasts for the number of civilian aircraft as the global tourism boom continues.

Expected fleet development
Source: Oliver Wyman

Profits could also increase as Rolls’ successful transformation program continues. Margins improved significantly (reaching 18.6% in the first half) thanks to measures such as job cuts and contract renegotiation.

Case against

Still, there are risks to Rolls-Royce and its stock in the short term and beyond.

One of them is the threat of a decline or stagnation in sales if the global economy weakens. Given the relatively constant flow of weak data from the US, this scenario cannot be ignored.

There is also the issue of ongoing supply chain problems in the aerospace industry. Rolls warned of “challenging supply chain environment” in its half-year results and warned that it could take up to 24 months.

I am also concerned about a serious equipment failure that could result in lost sales and large financial penalties. In recent weeks CathayPacific grounded many of its aircraft due to a fuel nozzle problem in the Trent XWB-97 engine.

Verdict

There are certainly reasons to remain optimistic about Rolls-Royce and its share price prospects. However, there are also serious dangers that can throw an engine builder off course.

With a forward P/E ratio of almost 30 times, I think that, all things considered, most of the good news is reflected in the company’s share price. In fact, I fear that such a high valuation could cause the company’s stock to plummet if the flow of information about the company begins to wane.

Therefore, despite bright growth forecasts, I would rather buy other FTSE 100 shares today.