Is The Rolls-Royce Share Price About To Fall?

Image source: Rolls-Royce plc

He Rolls-Royce (LSE: RR.) share price has been a great FTSE 100 success story, there is no doubt about that.

It has quadrupled in two years and has increased 33% in five years.

But if I owned Rolls-Royce shares, I'd be nervous now. I wonder if there might be a fix in the works.

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Correction or collapse?

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

And if we saw a 20% drop, I would call it a crash. And Rolls-Royce shares would continue to rise 250% in the last two years.

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

Let's see how forecasts place the stock's valuation in terms of price-earnings ratio (P/E) and dividend yield (DY). And how either of these two fall scenarios could affect you.

Expected valuations

Based on…	2024 PHYSICAL EDUCATION	2025 PHYSICAL EDUCATION	2026 PHYSICAL EDUCATION	2024 DY	2025 DY	2026 DY
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% drop	23.1	19.6	17.2	0.80%	1.3%	1.9%

^{Sources: Yahoo!, MarketScreener}

I have to ask myself a key question. How would you view the valuation of a stock with a projected 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 would be well below average.

It wouldn't seem like a spectacular purchase to me. And that's even if Rolls-Royce's share price fell by 20%.

Growth premium

If a valuation hides strong growth expectations, a higher P/E could well look attractive. And even the P/E of just under 21 that we could see with no share price declines could be a bargain.

And today, investors seem to expect strong profit growth for Rolls-Royce in the coming years.

With the company's results in 2023, I think it's fair to say that CEO Tufan Erginbilgic was excited. He spoke of record performance, radical change, improvement, focus and sustainable growth.

And he said: “We are unleashing our full potential as a high-performance, competitive, resilient and growing Rolls-Royce..”

super feeling

All of that is great. But when a CEO is this optimistic, alarm bells ring.

It's because there is one thing that drives a stock price more than anything else in the short term: sentiment. And Mr. Erginbilgic's words appear to have helped keep market confidence alive.

It drives momentum, and that drives the stock price up through the brokers' targets, and they keep pushing them up.

It's almost as if his reasoning simply went: “It has reached our goal, so we better increase it a little.“