Rolls Royce shares are the best-performing FTSE 100 shares of 2023 so far. The Rolls Royce shares price is up a bumper 147% since the start of the year and has left every other London-listed Bluechip in the dust.
One of the main drivers of Rolls Royce shares is the resumption of global travel after the pandemic. Revenue grew 28% in the first half of 2023 compared to the same period last year and operating profit jumped 9.7%.
The strong performance gave the board the required confidence to increase guidance full-year operating profit £1.2bn-£1.4bn and free cash flow to £0.9bn-£1.0bn.
Higher profit guidance is the result of the recovery from the pandemic but also the fruit of a multi-year transformation strategy Rolls Royce says has ‘started well with strong initial results’.
Tufan Erginbilgic, Rolls Royce CEO, was particularly bullish on the back of the results and indicated Rolls Royce was far from done:
“There is much more to do to deliver better performance and to transform Rolls-Royce into a high performing, competitive, resilient, and growing business.”
Rolls Royce shares have continued to rally since and investors will undoubtedly be questioning how high the stock can go.
Using Rolls Royce EPS for the first half in a price/earnings valuation would suggest the run isn’t over yet. Annualising the first half’s EPS of 4.9p to 9.8p would give Roll Royce a PE Ratio of around 23x earnings.
However, this doesn’t allow for EPS growth in the second half. If the top end of Rolls Royce operating profit guidance is achieved, and margins are maintained, EPS could be as high as 12p for the year.
This would translate to a PE Ratio of around 19x which isn’t expensive.
From a technical perspective, the market depth prior to the pandemic favours a move into the 300p-320p region. 260p is an important level of resistance and some may take profit around this level.
Both a basic analysis of their earnings multiples and the technical set-up of the stock suggests the Rolls Royce share price could have plenty left in the tank.