After a storming 2023, the Rolls Royce share price has continued its ascent in the new year after a positive full-year earnings release supported the investment case.
When the engine maker released full-year earnings last week, Rolls Royce provided the justification investors needed to continue to hold the stock. At least for now.
Rolls Royce issued solid results for the last year and an outlook which suggests the CEO is far from done with his turnaround plan.
Rolls Royce shares are up 146% over the past year and were the best performing FTSE 100 shares of 2023. For this rally to continue, Rolls Royce investors will need to see the company meet and even exceed the 2024 guidance set out last week.
The company said they were targeting £1.7bn-£2.0bn operating profit in 2024 after recording £1.59bn in 2023.
Although the rise in profit over the past year warrants multiple expansion to a degree, Rolls Royce will be vulnerable to any suggestions issued guidance may not be met.
Rolls Royce is currently priced for what investors think they’ll achieve in 2025 or 2026. The underlying business performance needs to maintain momentum or investors will be looking for the exit.
That said, Rolls Royce is operating in an extremely favourable environment.
The stars have aligned for the company. An ambitious CEO not scared of making difficult decisions has come in at a time when the macro environment is highly supportive of companies with exposure to travel.
During the cost of living crisis, consumers have opted to allocate their discretionary spending on holidays. Consumers are happy to cut back on other nonessentials but are not willing to sacrifice a holiday. This is the case across most of the Western world.
Travel demand has increased flying hours feeding straight into Rolls Royce’s top line. In addition, the bounce back from the pandemic has bolstered demand for air travel, and airlines are being forced to expand capacity with new plane orders.
Just this week, the Ryanair boss said they are experiencing a shortage of planes after the delivery of a number of Boeing planes was delayed.
Brokers have reacted positively to the news and a string of price target upgrades followed last week’s update. JP Morgan have bumped their price target up to 475p from 400p.