Will the Rolls-Royce share price rise 5% or 36% by this time next year?

The Rolls-Royce (LSE:RR.) share price extravaganza shows no signs of coming off the boil. It surged to fresh peaks after its financial report last week, and is now 68% higher than it was a year ago.

But risks remain for the company, with conflict in the Middle East adding another layor of danger. Could the FTSE 100 engineer be about to run out of steam?

The answer is ‘no,’ according to most City analysts. The average 12-month price target on Rolls-Royce shares is £13.72 per share, up 5% from today’s £13.02. One broker thinks they’ll rise as high as £17.70, which would represent a 36% increase.

But I’m not so sure about these bullish forecasts…

What’s it said?

Judging from last week’s full-year update, it seems Rolls-Royce can do no wrong. Full-year underlying revenue and operating profits both beat expectations, soaring 14% and 38% respectively.

According to eToro, the company’s turnaround programme “is now delivering in spades“, while strong end markets are turbocharging performance too. Rolls’ underlying operating margin climbed to 17.3% from 13.8% in 2024.

Cash is flowing, meaning the firm’s targeting between £7bn and £9bn in share buybacks over the next three years. To cap things off, Rolls tipped underlying operating profit of £4bn to £4.2bn for 2026, roughly 10% ahead of market expectations. And it hiked its mid-term targets again, to between £4.9bn and £5.2bn.

So what’s the problem?

There’s no doubt about it. Rolls-Royce’s recovery from the pandemic era, when it appeared to be on the brink, has been sensational. Sure, it’s been helped by a sustained rebound in key markets, especially civil aviation. But strong execution of its ambitious restructring plan has also been played a critical role.

However, here’s the problem. Investors are now used to the business outperforming and upgrading profits and cash flow forecasts. What happens if this suddenly stops?

Rolls-Royce’s elevated share price reflects market expecations that the party will continue. Its price-to-earnings (P/E) ratio is an enormous 38.1 times, well above the 10-year average of 15-16.

Any signs of slowdown, therefore, could see the market rerate Rolls’ shares. Forget about the prospect of limited price gains from this point on. If momentum starts to cool, there might be sharp drop in the value of the engineer’s stock.

What could throw Rolls shares off course?

And there are a number of challenges that could make life very difficult for Rolls from this point. Major supply chain problems continue, pushing up costs and impacting product deliveries. Shortages of labour and critical materials are tipped by aerospace industry participants and analysts to linger for some time.

Other persistent threats include competitive pressures that result in lost contracts and falling margins, cost inflation that erodes profits, and project delivery setbacks for in key areas like small moduler reactors (SMRs) and UltraFan plane engines.

The biggest danger, though, might be a sharp deterioration in the civil aviation market. With economic uncertainty growing, and now the conflict in the Middle East causing widescale flight disruptions, this is a very real threat in my view.

I’m not saying Rolls-Royce shares aren’t worth serious consideration right now. But they are high risk at current prices, and investors need to think carefully before adding the FTSE 100 flyer to their portfolios.

The post Will the Rolls-Royce share price rise 5% or 36% by this time next year? appeared first on The Motley Fool UK.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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