Rolls-Royce share price has been in a strong bull run this year, making it one of the best-performing companies in the FTSE 100 Index. It jumped to a high of 910p this month, pushing its market capitalization to about $100 billion.
This article explores why the RR stock has jumped and why the discounted cash flow (DCF) valuation model points to a 20% discount.
Why Rolls-Royce share price has jumped
Rolls-Royce Holdings stock price has soared as its three core businesses continued firing on all cylinders.
Its energy business is thriving because of the rising demand from data center companies. It is also benefiting from the ongoing growth in the nuclear energy business.
The UK government selected Rolls-Royce to build its small modular nuclear reactors. It will fund the company to build three SMR, amounting to 1.5 gigawatts of electricity, enough to power about 1.5 million homes. The government will spend about £2.5 billion on this project.
Once successful, the company will likely win more contracts as the SMR industry is expected to keep growing. One of the potential customers is Qatar, which invested in Rolls-Royce’s SMR project in 2021.
At the same time, the government also announced a new £11.5 billion state funding for the Sizewell C nuclear plant in Suffolk. Rolls-Royce will likely be selected to supply reactors for this project.
Second, Rolls-Royce share price has soared because of the booming civil aviation industry, where the company manufactures engines and offers long-term services to airlines. Demand for wide-body jets has jumped in the past few years.
One of the top catalysts is that China plans to order hundreds of narrow and wide-body planes from Airbus in July. Such a move would benefit Rolls-Royce since it is one of Airbus’ biggest engine players.
Rolls-Royce Holdings will likely continue dominating the Chinese aviation sector as relations between the US and China deteriorate.
Third, Rolls-Royce defence business is expected to boom in the near term as countries boost their spending.
Strong financial results and valuation
Rolls-Royce stock price has also jumped as the company’s growth accelerates. A good example of this is the fact that it achieved its previous mid-term revenue, profit, and cash flow targets ahead of schedule.
It then created new targets for 2027 and 2028. It now expects that its operating profit will be between £2.5bn and £2.8bn, while its margin will be between 13% and 15%.
The company also expects that the free cash flow will be between £2.8 billion and £3.1 billion by that time.
This growth will then accelerate in 2028 as it will make an operating profit of between £3.6 billion and £3.9 billion and a free cash flow of between £4.2 billion and £4.5 billion.
These numbers mean that the company will likely boost its dividend and share buybacks. It is now implementing a £1 billion buyback, which will boost its earnings per share.
Further, a DCF calculation by Simply Wall Street notes that the company is trading at a 20% discount, with its target price being at 1,090p.
Rolls-Royce share price analysis
The daily chart shows that the RR stock price has been in a strong bull run in the past few months. It recently crossed the important resistance level at 811p, the highest swing on March 19. Moving above that level invalidated the double-top pattern.
The stock has remained above the 50-day and 100-day Exponential Moving Averages (EMA). Also, the Relative Strength Index (RSI) and the MACD continued rising. Therefore, the stock will likely continue rising as bulls target the key resistance at 1,000p.
Read more: Rolls-Royce share price nears 1,000p as a new catalyst emerges
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