Rolls-Royce share price outlook: May 23rd will be crucial
Rolls-Royce (LON: RR) share price has remained in a tight range since April as investors assess the ongoing earnings season. It was trading at 418p on Friday, where it has been stuck since March 21st. It has soared by over 1,080% from its lowest point this year.
Turnaround continues
Rolls-Royce Holdings is going through a remarkable turnaround in the past few years. A company that was not expected to survive the Covid-19 lockdowns has now become one of the best players in the FTSE 100 index.
This swift recovery happened because of internal and external factors. Externally, most industrial companies like BAE Systems, Emmerson Electric, and Illinois Tool Works have all rebounded this year.
Rolls-Royce has also benefited from the ongoing external events in its key industries. In defense, the UK has joined with the US and Australia to form AUKUS, a major military alliance. Japan is also considering joining too.
At the same time, the rising geopolitical issues have pushed more countries to invest more money in defense and the trend will continue.
Meanwhile, in civil aviation, most airlines have made orders from Boeing and Airbus. In its recent earnings report, GE Aerospace said that its total orders in Q1 rose by 14% to $20.1 billion. This is important since GE is Rolls-Royce’s biggest competitor.
Also, many airlines have now recovered their load factors from the dip during the pandemic. Rolls-Royce makes most of its money from airlines like Emirates and Etihad by servicing their engines.
Internally, Rolls-Royce Holdings has boosted its profitability targets. It aims that its operating profit will rise to between £2.5 billion and £2.8 billion in the mid-term, a big increase from 2023’s £1.6 billion.
The company aims to do that by boosting its operating margin to between 13% and 15% by 2027. Its operating margins stood at 10.3% in 2023. One approach for achieving these targets is getting out or slowing its most ambitious targets. For example, it announced that it would scale back its nuclear factories in the UK.
Still, there are concerns about the company’s valuation. Its market cap has surged to over £44 billion, which is higher considering that its profit after tax rose to £1.1 billion in 2023.
Factoring in its operating profit of £2.8 billion in 2027, it means that the company has a price-to-operating profit multiple of about 15.7, which is not cheap.
Looking ahead, the next important Rolls-Royce Holdings catalyst will be its annual general meeting scheduled for May 25th. The company will likely use this meeting to provide an update about its performance year-to-date.
Rolls-Royce share price forecast
Turning to the weekly chart, we see that the RR stock price has been in a strong bull run after bottoming at 35.60p in 2020. It has now soared above the key resistance point at 378.7, its highest swing in July 2018.
The stock has constantly remained above all moving averages after it formed a golden cross in August 2023. At the same time, the Percentage Price Oscillator (PPO) has also remained above the neutral level.
The recent pullback happened after the Relative Strength Index (RSI) moved to the extreme overbought level at 93p.
Therefore, the outlook for the stock is still bullish as long as buyers can push it above the year-to-date high of 434.3p. If this happens, the next point to watch will be at 450p. Moving above that level will invalidate the double-top pattern that has been forming.
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