Can the Rolls-Royce share price maintain growth post-earnings?

Rolls-Royce’s share price is soaring, with the publication of full-year 2022 results increasing momentum. A turnaround strategy from new CEO Tufan Erginbilgic has also built confidence, with promises of more details later this year. Despite the rally, however, the stock has not returned to pre-pandemic levels.

Rolls-Royce’s [RR] share price rose over 22% last Thursday, after full-year 2022 results trounced analyst expectations. Key to this was a post-Covid surge in international travel.

Underlying profit came in at £652m, well ahead of the £487m predicted by analysts, while revenue hit £12.7bn, up from £11.2bn the previous year. Rolls-Royce generated £505m in free cash flow last year, again beating analyst expectations.

A recovery in international travel saw large engine flying hours for civil aerospace climb 35% year-on-year; this year Rolls-Royce expects the total will reach 80-90% of 2019 levels. This is an important metric, as the company makes a substantial amount when its engines are flying or being serviced. Rolls-Royce is guiding for operating profits of between £800m and £1bn for the full year and free cash flow of £600m to £800m.

Rolls-Royce share price boosted by turnaround strategy

Rolls-Royce’s new CEO Tufan Erginbilgic said that the company was capable of “materially higher profit, cash flows and returns”.

Having taken over from Warren East in January, former BP executive Erginbilgic has been unflinching in his criticism of Rolls-Royce’s business model, describing the company as a “burning platform” in an internal briefing leaked to the Financial Times. Erginbilgic said that “every investment we make, we destroy value” and that financially the company underperforms “every key competitor out there”.

Erginbilgic’s first hire is Nicola Grady-Smith, brought in from BP to take the role of chief transformation officer. Grady-Smith will be in charge of delivering Erginbilgic’s transformation program, hopefully lifting profits and helping it compete with bigger rivals.

Considering Rolls-Royce has gone through several restructures in recent years, when it comes to turnaround strategies it might be a case of show, don’t tell; more details on Erginbilgic’s plan are due later this year.

Other tailwinds this year for the engine-maker include a deal to collaborate with Airbus on new aircraft for Air India.

Deutsche Bank and JP Morgan up price target

In January Deutsche Bank analysts upped their rating on Rolls-Royce from ‘hold’ to ‘buy’. At the time, the analysts pinned a 136p price target on Rolls-Royce shares, citing the “game-changing” reopening of the Chinese economy as a growth driver. That target has now been hit, with Rolls-Royce’s share price closing Friday at 136.04p.

Investors might be asking whether any upside remains in the stock. Year-to-date, the RR share price has climbed over 45%. Despite this rally, however, the stock is well off pre-pandemic levels.

Rolls-Royce’s shares hit an intraday high of 243.99p on 13 February 2020, before plummeting as the pandemic decimated demand for new engines. By 2 October 2020 the stock was trading at 34p a share. While the share price is well above that low, it is still 45% off February 2020 levels.

Analysts at JP Morgan see further downside in the stock, having increased their price target on Rolls-Royce to 90p following the earnings call. While the analysts raised targets for EPS and free cash flow for 2023-25, they described Erginbilgic’s turnaround strategy as “risky”, maintaining an ‘underperform’ rating on the stock.

“It seems that Mr Erginbilgic aims to de-lever RR's balance sheet organically; we believe this is a risky strategy and leaves RR highly vulnerable to any unexpected shocks in the next few years,” wrote the JP Morgan analysts.

The 16 analysts polled by the Financial Times have a 12-month median price-target of 110p on Rolls-Royce’s stock. Hitting this would see a 19.1% downside on Friday’s close. Of the 20 analysts offering ratings, 11 gave it a ‘hold’.