Rolls-Royce share price has pulled back in the past few weeks, moving from the all-time high of 1,306p on January 13 to the current 1,235 as some investors started booking profits.
US flight cancellations and Middle East tensions
It retreated by over 1.4% on Monday after airlines cancelled thousands of flights in the United States because of the large snowstorm.
These cancellations will likely have a minor impact on Rolls-Royce Holdings, a company whose revenue growth depends on flight hours.
On the positive side, there are signs that the situation is normalizing, with Sean Duffy, the Transportation Secretary, predicting normal conditions on Wednesday.
Rolls-Royce share price has also retreated amid the rising tensions in the Middle East that may impact the aviation sector. Donald Trump has sent an armada to the Middle East and is actively considering options for Iran. A war in the region would also lead to more disruptions.
Analysts are optimistic about its growth
City analysts believe that Rolls-Royce Holdings’ business will continue thriving in the coming years. The average estimate among these pros is that its underlying revenue for the last financial year will be £19.5 billion, much higher than what it made in 2024.
Its revenue will then jump to £21 billion this year, £23 billion in 2027, and £25 billion in 2028. This revenue growth will happen as the company’s civil aviation business booms and average flying hours jump.
Most importantly, the management’s efforts are expected to improve its profitability substantially higher over the years. For example, the free cash flow is expected to jump from £3.1 billion in 2025 to £4.5 billion in 2028, a 45% surge.
The other notable catalyst for the Rolls-Royce share price is that GE Aerospace, its biggest competitor, published strong financial results last week. It said that its orders grew by 32%, while its adjusted revenue rose by 21% and its operating profit jumped by 25% to over $9.1 billion.
This growth is a sign that the industry is doing well, which is a good thing for Rolls-Royce Holdings.
Is Rolls-Royce a bargain or expensive?
The main concern among analysts is that the Rolls-Royce share price surge has made it a highly overvalued company. Data compiled by Simply Wall St shows that the company is about 25% overvalued based on the discounted free cash flow (DCF) calculation. This estimate places its potential target at 987p.
However, other valuation metrics show that it is an undervalued company. It has a price-to-earnings ratio of 17.8x, lower than its other peers like BAE Systems, Babcock, and GE Aerospace. However, its forward PE ratio of 26 is higher than that of these companies.
A potential catalyst for the company is that its small modular reactors (SMR) business will continue doing well in the coming years.
Rolls-Royce share price technical analysis
The daily chart shows that the RR stock price has formed a highly bullish pattern that may lead to a rebound. It is now forming a bullish flag pattern, which is made up of a vertical line and a descending channel.
The stock has remained above the 50-day and 100-day Exponential Moving Averages (EMA) and the Supertrend indicator. Therefore, the most likely outlook is bullish, with the next key target being at 1,306p, its highest point this year. A move above that level will point to more gains, potentially to 1,500p this year.
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