Image source: Getty Images
When Rolls-Royce Holdings (LSE: RR.) shares slumped in the initial US tariff confusion, it looked like it might have been a buying opportunity.
The price dipped to 31% below its highest point of the year, touching as low as 562p. Since then we’ve seen a 33% rebound.
Analysts currently have a consensus Rolls-Royce share price target of 803p. That’s actually lower than the 818p reached in March, and it might reflect a softening in the light of US tariffs.
Varied opinions
There’s a wide variation in individual broker targets, with the most bullish seeing Rolls reaching as high as 1,150p. The lowest outlook still suggests a crash all the way back to 240p, though. Hmm, maybe that one thinks it’s the UK that President Trump wants to put 145% duties on.
My fingers can’t count up to 11.5, so let’s take a look at what a £10 Rolls-Royce share price might mean.
At the current price level, forecasts put the stock on a price-to-earnings (P/E) ratio of 31 for the 2025 year. On its own it’s a fairly crude measure, and doesn’t account for any net debt or cash position. But with forecasts suggesting it should fall to 24 by 2027, it seems well within a range that growth stock investors might see as good value.
Rolls came close to being seriously damaged by debt in the Covid years. But it’s turned that round remarkably well, posting a net cash position in 2024. Analysts predict £1.6bn net cash at the end of this year, climbing all the way to £7.1bn in 2027.
Adjusted valuation
If we adjust the P/E ratio to allow for that, we can provide a valuation measure for the business itself. When I work that out, I see the 2025 P/E falling only a bit to approximately 30. But the forecast 2027 P/E drops to just a little over 21.
If the share price does reach £10, we’d see those two ratios increase to 40 for this year, and then 28 based on 2027 earnings.
How reasonable might that be? It’s hard to tell, as the valuations of some of the world’s biggest growth shares don’t make a lot of sense to me right now. Nvidia is on a forward multiple of only 25, below Rolls-Royce. Does the aero engine business deserve to be more highly valued than the world’s leading developer of artificial intelligence chips? On that basis, Rolls might seem expensive.
But then, the forward P/E we see at electric vehicle leader Tesla of 156 might make Rolls look dirt cheap. Growth stock valuations seem far from rational to me at the moment. I expect they’ll shake out in the next few years.
Will it make it?
I’m not going to even try to predict where the Rolls-Royce share price might go by the end of this year. And predictions and comparisons are pulling in all sorts of directions. But I will say that the valuations associated with a £10 price target don’t look too high to me. It could happen.
