The Rolls-Royce [LON: RR] share price has undergone a remarkable transformation in the last two years. As recently as October 2022, the shares could be had for as little as 70p. Since then they have soared more than 500% to current levels of just under 450p, driven in part by the airline industry’s post-Covid recovery.
Rolls-Royce’s fortunes are closely tied to those of the airline sector, as the company makes money from servicing and maintaining the plane engines that it builds for clients such as Lufthansa and Emirates. In 2023, Rolls-Royce’s civil aerospace division accounted for nearly 50% of its underlying revenue. Air travel – or, more specifically, large-engine flying hours (LEFH) – is therefore crucial to the company’s success.
So far in 2024, Rolls-Royce shares have increased almost 50% as LEFH in the first four months of the year returned to 100% of 2019 levels, up from 88% in 2023. However, since reaching a 52-week intraday high of 488.5p on Friday 21 June (and revisiting that level on Monday 24 June), the shares have fallen roughly 10%. The pullback was partly due to Airbus issuing disappointing forward guidance, with the aircraft maker citing Rolls-Royce engine issues. Time will tell whether this proves to be a temporary knock to the share price.
As Rolls-Royce prepares to report its half-year results on Thursday, many traders will be wondering whether the shares can return to their year-to-date highs.
What next for shares of Rolls-Royce?
It’s not just the recovery in international flights that has helped the Rolls-Royce share price to take off. Spending on defence – another key business area for the company, representing about 25% of underlying revenue last year – has also increased, partly due to the war in Ukraine that began in 2022. Increased demand for Rolls-Royce’s power generators from data centres and artificial intelligence firms, and its development of mini nuclear power stations (known as small modular reactors, or SMRs), have also given the stock a lift. These growth drivers seem set to remain in play for the foreseeable future, and could help buoy the shares over the medium to long term.
As for the shares’ near-term prospects, much will depend on Thursday’s half-year results. Back in February, the FTSE 100-listed company’s 2023 full-year results guided an underlying operating profit of £1.7bn to £2bn for 2024, up from £1.6bn in 2023. If the announcement on Thursday shows that Rolls-Royce is on track to meet or exceed its target, the shares could receive a boost. On the other hand, a disappointing set of numbers could send the stock lower.
Rolls-Royce share price, December 2023 - present
Overall, the consensus among analysts remains positive. Forecasts collected by the Financial Times in July show that, among a group of 18 analysts, four rated Rolls-Royce shares a ‘buy’, 10 ranked them ‘outperform’, three labelled them a ‘hold’, and only one gave them an ‘underperform’ rating. There were no ‘sell’ ratings in the sample.
Furthermore, of the 16 analysts who offered a 12-month price target for Rolls-Royce shares, the median estimate of 532.5p represents a 21.1% increase from the closing price of 439.8p on 29 July. The high estimate of 600p implies a 36.4% increase, while the low estimate of 240p would represent a 45.4% decrease.
The median price target of 532.5p suggests that Rolls-Royce shares have the potential to make further gains over the next year. So, while the stock may not have peaked, its rapid rise since 2022 seems set to level off. Nevertheless, investors will be hoping for signs of steady improvement across the business when Rolls-Royce issues its half-year results on Thursday 1 August.
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