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I Company Rolls-Royce Holdings (LSE: RR.) share price has nearly doubled in 2024, capping an impressive comeback from the depths of the 2020 stock market crash.
What lies behind the crack year? And can Rolls shares repeat that in 2025?
Debt, what debt?
I would say the real key to Rolls-Royce’s relaunch is debt. Or rather, the way it was disappearing.
The debt nearly crippled the company in the worst days of the pandemic. Total debt reached more than £5bn by the end of 2021.
But during the 2024 interim results in August, the company had this to say: “Total debt fell to £0.8bn driven by statutory cash flow from operating activities of £1.7bn.“
What’s more, consumer forecasts even put Rolls in the bullpen by the end of the year.
Rolls-Royce gets my balance sheet of the year award. No, in the century.
New management
Without a doubt, the drive and enthusiasm of not-so-young boss Tufan Erginbilgic has put something in Rolls-Royce’s step. In the November review of the wax trade: “Our transformation of Rolls-Royce into a highly efficient, competitive, strong and growing business continues with speed and momentum. … There is still much we need and want to do, as we expand the income and financial strength of Rolls-Royce.”
Now, I know that CEOs of companies often talk things out. But this one has put his money where his mouth is. Or rather, in the pockets of shareholders.
I quote him here in part as an example of how he has been promoting the amazing change we have seen. But also as a warning.
Note the slip
There’s something I’ve seen happen a lot with a company that has a lot of hope. The company sets ambitious goals and consistently meets them. In fact, it exceeds expectations time and time again. And the company’s executives are, understandably, openly enthusiastic.
But beating expectations, not just meeting them, can be expected rather than the exception.
And if one day a set of results does not meet the high hopes of the big investment bulls? We often see them sell, and the share price goes down.
So, the thing that scares me the most about the 2025 Rolls-Royce price tag is exactly that. For one quarter perhaps, the company may post very acceptable results, but not results that are better than expected.
In fact, I think that is inevitable. No company I know of has ever been able to consistently exceed expectations.
Predictions and measurements
I prefer managers to under-promise and over-deliver, not at the risk of falling into the opposite direction.
Still, even with that in mind, the forecasts actually make the Rolls-Royce stock valuation seem reasonable to me.
We look at the price-to-earnings (P/E) ratio forecast for the 32nd full year. But if income continues to grow as predicted, it could drop to 25 by early 2026. And depending on what the next few years look like, that could be attractive.
To me? I don’t buy high growth stocks these days. But if I do, I’ll be scratching my head over this.
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