Stock market

Are Rolls-Royce share prices falling?

Image source: Rolls-Royce plc

gave Rolls Royce (LSE: RR.) share price has been great. FTSE 100 A success story, no doubt about it.

It has quadrupled in two years, and is up 33 percent in five years.

But if I held Rolls-Royce shares, I’d be nervous now. I wonder if a fix might be in the pipeline.

Fix, or crash?

In stock market terms, this is generally considered a decline of at least 10%.

And if we see a 20 percent drop, I would call it a crash. And Rolls-Royce shares would still be up 250% over the past two years.

So could we see a 10% correction in 2024, or even a 20% crash?

Let’s see how forecasts determine stock value in terms of price-to-earnings (P/E) ratio and dividend yield (DY). And how either of these two fallout scenarios might affect him.

Forecast prices

Based on… 2024
Current share price 27.8 23.5 20.6 0.67% 1.1% 1.6%
with 10% correction 25.2 21.3 18.7 0.74% 1.2% 1.8%
With a 20% crash 23.1 19.6 17.2 0.80% 1.3% 1.9%
Sources: Yahoo!, MarketScreener

I have to ask myself an important question. How do I value a stock with a forecast 2026 P/E of 17 and a dividend yield of 1.9%?

Well, that P/E would be above the long-term average of the FTSE 100, and the dividend yield is well below average.

It wouldn’t sound like a screaming purchase to me. And that’s even if Rolls-Royce’s share price drops by 20 percent.

Growth premium

If a valuation is hiding strong growth expectations, a high P/E may well look attractive. And even a P/E of less than 21 that we could see without share price declines could be a bargain.

And today it seems that investors expect strong earnings growth for Rolls-Royce over the next few years.

With the firm’s 2023 results, CEO Tufan Erginbilgic was, I think it’s fair to say, excited. He talked about record performance, phase change, improvement, focus, and sustainable growth.

And he said:We are unlocking our full potential as a high-performing, competitive, flexible, and growing Rolls-Royce.

Super emotions

It’s all great. But when a CEO sounds this enthusiastic, it sets off alarm bells.

That’s because there’s one thing that drives share prices more than anything else in the short term — emotion. And Mr Erginbilgic’s words have helped echo market sentiment.

It drives momentum, and it drives the share price up through the broker’s targets, and they keep pushing them up.

It’s almost as if their reasoning is simply: “It’s reached our goal, so we’ll make it a little better.

Safety margin

I really don’t know if the Rolls-Royce share price will fall in 2024. And if nothing sparks hope, the year could end even further.

I don’t see a safety margin here if it doesn’t swim 100% well. Or when volatile sentiment should be transferred to another stock or sector.

That’s all I’m saying.

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