Rolls-Royce share price can’t go down! But is it too extreme?

It’s been an incredible year for Rolls-Royce (LSE: RR.) share price. Over the past 12 months, the stock has risen 140.4%.

We have seen its good form continue recently. Over the past month, the stock has risen 5.9%. It has increased by 6.6% in the last five days alone.

But now sitting at £5.28 a share, what’s next for the British icon? While it may seem like Rolls stock can’t slow down, is there a threat of it going too far?

Before we dive into that, I want to examine what has been behind the rise in stock prices over the past week or so. The reason is that Rolls was chosen by CEZ Group, a company from the Czech Republic, as the preferred option for its small modular reactor (SMR) program out of seven potential reactors.

Investors have been bullish on Rolls’ SMR business for some time. Therefore, it is not surprising that the share price jumped when this deal was announced.

Measurement

But with its recent rise pushing the share price comfortably to the £5 mark, is there room for further growth?

There are several ways to answer that question. Let’s start by looking at the stock’s valuation.

It currently trades at a price-to-earnings (P/E) ratio of 19.1. That’s more than the FTSE 100 average of about 11. As seen below, if you look forward its forward P/E rises to 31.

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Then there is its price-to-sale (P/S) ratio. As the chart below highlights, its current P/S is 2.5. That’s slightly more than its FTSE 100 competitor BAE Systems (1.6).

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More to come?

Based on that, it is possible to argue that Rolls-Royce is more valuable. But what do experts see the stock doing in the future?

Fourteen analysts providing a 12-month price target for it have an average price of £5.81, which represents a 10.2% premium from where the stock sits today.

Of course, analysts’ predictions may be wrong. However, it is clear that overall, they believe it can continue to climb.

Big picture

I can see why. Business has produced a major U-turn from where it was during the violence. Under CEO Tufan Erginbilgic, the company has transformed back into the powerhouse it once was.

Under his leadership, profits have increased. In its latest half-year review, Rolls posted an operating profit of £1.1bn, up 74% from the same period last year. Looking longer term, the company is targeting £2.8bn in operating profit by 2027.

Of course, that will not come without challenges. For example, supply chain issues can be a stumbling block. In its update, it highlighted that it expects a financial impact of up to £200m from these issues in its free travel for the year. There is a threat that this risk will continue for the next 24 months.

But despite these challenges, this is a stock I like today’s look. Although its rating may seem expensive, I am happy to pay for the quality. And with Rolls-Royce, I think it has a lot. I hope to have money this month to pick up shares.