Rolls-Royce shares fly through resistance to 5-month high

• Rolls-Royce (LON: RR) share price hits a five-month high of 120p on Wednesday (25 August)
• Despite being the best-performing stock on the FTSE 100 in the last 30 days, the stock continues to be undervalued
• Last week, JPMorgan analysts raised its RR target price to 130p from 105p
• Keen to take a chance on Rolls-Royce? Open an account with us to start trading the stock.

Why is the Rolls-Royce stock heating up?

Rolls-Royce shares are up nearly 10% in the last one week, as global pandemic sentiments began to improve.

Nevertheless, despite the stock being the best-performing on the FTSE 100 in the last 30 days, it continues to trade at least 50% below its pre-pandemic moving average price of around 250 pence per share.

Analysts also view the aviation engineer’s stocks as severely undervalued when compared to its peers, as a DCF valuation metric shows that Rolls-Royce shares have been trading around 70% lower than competitors.

Although RR shares are currently trading at 119p each as of Wednesday morning, it will have to maintain this pace through the session for a bullish tone to be taken seriously. The stock had previously found resistance at 113p, a level it was unable to surpass for close to three weeks.

Still, the outlook on the stock is a positive one, with the aviation sector expected to bounce back strongly in the coming years. Analysts’ long-term fair value estimates also indicate more upsides ahead.

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Why did JPMorgan raise its target price by 24%?

Case in point: JPMorgan analysts raised their price target on RR last week to 130p from 105p, on the back of higher earnings forecasts over the next three years by 49%, 31% and 25% respectively.

The higher forecasts also take into consideration potential structural challenges, including the recovery of long-haul flights, JPMorgan said in a note on 17 August.

The firm also predicted that a reported sale of the group’s Spanish unit ITP Aero to consortium-led investment house Bain Capital for a rumoured €1.6bn (£1.5bn) could boost free cash flow to around £750 million by 2023.

Finally, the analysts noted that Rolls-Royce’s first half underlying profits for 2021 beat consensus estimates by £536m, which indicated that its cost-cutting programme is starting to pay off.

Rolls-Royce itself, however, cast some doubts about its performance for next year, saying its 2022 goals could be delayed, as flying hours might not rebound quickly enough.

The group had earlier expected to reach free cash flow of £750 million as early as next year. Now, CEO Warren East says that ‘the exact rate and timing of return is out of our control’.

Still, the company maintained its guidance for free cash outflow to improve to £2 billion this year, and for cash flow to turn positive in 2H 2021.