With the Rolls-Royce (LSE:RR.) share price surging nearly 90% within the final 12 months, the engineering big has reached a record-high valuation of £68bn. That’s over 800% larger than just some years in the past, demonstrating the speedy enhancements new CEO Tufan Erginbilgiç has delivered throughout the corporate. And now, with European defence spending on the rise, a brand new kindly tailwind is blowing for Rolls-Royce.

So can the engineering big proceed to surge?

The facility of exceeding expectations

Analyst consensus for 2024 is that income’s anticipated to achieve £17.35bn, and earnings per share will land at 18.18p. Following the group’s newest outcomes, traders have been understandably happy that the corporate smashed forecasts, with gross sales touchdown at £17.85bn and earnings at 20.17p per share.

Exceeding earnings expectations by double digits is not any straightforward feat. But continued operational efficiencies helped ship better-than-expected margin enlargement. Subsequently, underlying working income surged from £1.59bn to £2.46bn, whereas free money movement primarily doubled from £1.29bn to £2.43bn. And better of all, that tipped Rolls-Royce’s steadiness sheet right into a web money place of £475m.

But taking a look at administration’s steering for 2025, this momentum doesn’t appear to be stopping. Free money movement‘s anticipated to achieve as excessive as £2.9bn by the tip of this yr, with underlying working income coming in at an analogous stage.

What’s extra, the group’s 2028 mid-term targets additionally acquired upgraded, with free money movement on monitor to achieve wherever between £4.2bn and £4.5bn, with underlying working margins rising from the present 13.5% to as excessive as 17%. Pairing all this with a shock £1bn share buyback announcement, it’s no thriller why the Rolls-Royce share price has been on a rampage.

However what does this all imply for traders hopping on board now?

The place’s Rolls-Royce headed?

As thrilling because the inventory’s efficiency has been, it’s vital to not get too caught up within the pleasure. On a ahead price-to-earnings foundation, the shares are at present buying and selling at 34 instances the projected income for 2025. That’s definitely not low cost. And it suggests traders have already baked within the agency’s revised 2028 earnings targets.

That is seemingly why, when taking a look at analyst forecasts, the common consensus reveals a 12-month price goal of simply 807.5p. That’s a 1% projected acquire from present valuations.

In fact, administration’s developed a behavior of beating expectations. So if it continues to ship better-than-expected outcomes, extra double-digit returns might be simply across the nook. Nevertheless, ought to the corporate stumble, then with a lot future development already baked into the share price, shareholders could need to endure some downward volatility.

One potential reason for this is able to be provide chain disruptions. Like many aerospace companies, Rolls-Royce depends on just-in-time logistics. And with geopolitical tensions excessive in Japanese Europe, provide chain disruptions could begin to emerge if the scenario escalates. Alternatively, ought to circumstances begin to calm, defence spending guarantees throughout Europe could fail to materialise, hampering a development catalyst for the enterprise.

As a enterprise, I imagine Rolls-Royce has delivered a reasonably exceptional turnaround because of prudent management. However as a inventory, the valuation’s a bit too wealthy for my tastes proper now. As an alternative, I’m taking a look at different firms on this sector which might be way more fairly priced.