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As we approach the end of the year 2023, my attention shifts towards the potential winners for the upcoming year. Undoubtedly, the stocks of Rolls-Royce (LSE:RR) demand attention.
If I had invested in a FTSE 100 component five years ago, I would have experienced significant fluctuations. During that period, the stock notably exceeded the 300p mark. However, the emergence of COVID-19 and its repercussions led to a decline of over 60% in its stock value. Subsequently, the company saw remarkable profits from the lows of 2020, marking an impressive surge of 180% in the last 12 months.
Given this robust performance, is it likely to continue in the following year and beyond?
Several analysts certainly hold this view. Bank of America, barclays and Morgan Stanley all anticipate strong profits for the stock. The latter recently adjusted its target price from 166p to 275p. At its current price, this indicates a rise of 12%. Barclays also elevated its outlook to ‘overweight’ from ‘equal weight’, along with a target price of 270p. While these predictions are not certain, this optimistic forecast will undoubtedly bolster investor confidence.
In addition, CEO Tufan Erginbilgic, who assumed the position earlier this year, is focused on cost reduction as the company continues to implement its long-term strategy. In 2020, Rolls-Royce cut 9,000 jobs due to the pandemic and now plans to eliminate a further 2,000-2,500 positions. Upon assuming the role, Erginbilgic described the company as being at a “burning stage” and with these initiatives, they aim to minimize redundancy across business sectors.
Another positive aspect is the robust recovery witnessed in the airline industry. Several companies in this sector, including Ryanair, have released positive updates recently. For Rolls-Royce, which derives 46% of its revenue from its civil aviation segment, this presents a significant boost.
However, some reservations persist. Despite the strong recovery, uncertainty looms in the aviation sector. Travel restrictions resulting from conflicts in Ukraine and the Middle East continue to hinder air travel. Further escalations could lead to more flight cancellations.
Moreover, Rolls-Royce has been grappling with recurring supply chain issues. Erginbilgic mentioned in August that the supply chain stability is unlikely in the near future.
The company also carries a debt of 2.8 billion pounds. Although not an alarming amount, the impending due date of a significant portion of the debt by 2025 amplifies concerns.
Profit Prospects in 2024?
After considering the aforementioned factors, the question arises about the potential trajectory of Rolls-Royce’s stock price in 2024.
Several investment banks seem to favor an upward trajectory, and it is certainly plausible. I appreciate the measures Erginbilgic is implementing to create a more efficient business.
Nevertheless, as the saying goes, all good things must come to an end. Following an exceptional performance in 2023, I apprehend that the stock price may have reached its peak for the time being. The uncertainties in the aviation sector also warrant attention.
I will keep a close watch on the stock as we approach 2024, but I’ll refrain from making any decisions until then.
The post Could Rolls-Royce stocks maintain their performance in 2024? appeared first on The Motley Fool UK.
Bank of America is an advertising partner of Motley Fool company The Ascent. Charlie Keough holds positions in Barclays PLC. The Motley Fool UK recommends Barclays PLC. The views expressed on the companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a wide variety of insights can make us better investors.
Motley Fool UK 2023