Can Rolls-Royce shares break £10 next year?

Last year, the best performing share in FTSE 100 The reference was an aeronautical engineer Rolls-Royce (LSE: RR). This year, the company almost achieved the same impressive performance again. Shares of Rolls-Royce are up 93% so far in 2024, on top of last year’s best performance.

What if the company has another knockout year in 2025?

Another 93% rise would take Rolls-Royce shares to around £11.14 each.

Normally I wouldn’t expect a mature, blue-chip company with a large market capitalization to nearly double in value if it had already done so in the previous year. But the engine maker did that this year. Why not next?

Let’s check.

Momentum and basics

No one knows what will happen in the future in the stock market, or in the case of the price of each share.

But as a general rule of thumb, the few things that can tend to move a share up or down are what are known as which is basic again pressure.

Those drivers are as good as they sound: one is about the basic commercial idea of ​​a business that deserves a high or low share price, while the other reflects the fact that some stocks are driven up or down due to the rush of investors’ hopes or fears that may not always be completely rational.

They can play in isolation from each other: important (or negative) can help increase the momentum in the stock price movement.

But many investors take solace in the idea that momentum tends to be shorter than fundamentals: over time, strong performance will emerge.

Rolls-Royce is a business that does well

That would be truer on the way up than on the way down (think Gamestop for example). Good momentum can help a business raise capital that improves its bottom line.

Conversely, negative momentum in the stock market can push a company into the ground faster than its business fundamentals can justify.

Obviously, Rolls-Royce shares have benefited from the momentum as the fear of missing out has led to investors getting into the story. That poses a risk: if momentum changes, Rolls-Royce shares could fall even in the face of strong business performance.

Indeed, Rolls did well, as it focused on its business and set medium-term performance goals. It is also benefiting from the revival of strong demand for civil aviation after the challenging years of the pandemic.

Lots of riding on delivery

As a long-term investor, not a trader, I consider both momentum and fundamentals (as they can affect prices) but make investment decisions based on how I think the business will do.

Shares of Rolls-Royce already trade at a price-to-earnings (P/E) ratio of 21. For the share to reach £10, the P/E ratio would need to reach around 36, which is too high for me. your preference, or earnings per share will need to be much higher.

I think the expectations for strong business performance are already built into the price. Meanwhile, while earnings per share may benefit from cost-cutting and strategic focus in recent years, risks remain.

Any sudden drop in demand for civil aviation can hurt profits badly – and they have happened rarely and unexpectedly in the past. That risk alone makes me stop investing at the current rate.