Rolls-Royce share price is stuck in a correction: will it fall further or rebound?

The Rolls-Royce share price remains on edge this year as investors continue their focus on the ongoing US-Iran war that is having a major negative impact on the civil aviation industry. RR dropped to 1,200p today, down sharply from the all-time high of 1,420p, which it reached in February this year. So, is it safe to buy the dip or just stay away?

Rolls-Royce share price is stuck in a correction amid elevated risks

The RR stock price has pulled back sharply this year,  a trend that coincides with that of other similar companies. For example, GE Aerospace stock has tumbled by 15% from the year-to-date high of $348, while Safran has plunged by over 20% from its highest point this year.

The stocks have all dropped because of the ongoing US-Iran war that has impacted the civil aviation industry negatively, with some airlines cancelling their flights. There are also warnings that some airlines, especially in Europe, will experience a jet fuel shortage if the war continues.

Still, Rolls-Royce Holdings has moved to calm the market noting that its business was still firing on all cylinders despite the challenges. In a statement, the company maintained its forward outlook, noting that it was working to fully mitigate the financial impact of the disruption.

As a result, the management maintained the forward guidance, noting that it will still hit the operating profit of between £4 billion and £4.2 billion this year and free cash flow of between £3.6 billion and £3.8 billion.

City analysts are optimistic that Rolls-Royce’s business will continue doing well in the long term. Besides, the company survived the Covid-19 pandemic when the global travel industry stalled.

The average estimate is that its revenue will hit £22.7 billion this year, with its underlying profit before tax (PBT) rising to £4.09 billion. Its revenue is expected to surge to £27.54 billion in 2028, helped by the robust civil aviation industry and its other initiatives. The FCF is expected to jump to over £5.15 billion in that year.

RR stock valuation estimates

Rolls Royce stock is relatively undervalued compared with that of GE Aerospace. It has a forward price-to-earnings ratio of 18, much lower than GE’s 34.8. 

By using the forward estimates, the company has a forward PE ratio of 34.7, lower than GE’s 37. Its EV/EBITDA of 20.9 is also lower than GE’s 27.5. 

However, a DCF calculation shows that the company is relatively overvalued. It shows that the ideal price is about 928p, much lower than the current 1,200p. Also, its general valuation multiples shows that it is overvalued compared to the broader market.

Rolls-Royce stock price analysis

RR stock chart | Source: TradingView

The weekly chart shows that the RR stock price has jumped in the past few years, reaching its all-time high of 1,420p earlier this year. It then started pulling back after the start of the ongoing Iran war. 

Still, on the positive side, it remains above the 50-week Exponential Moving Average, which has provided it with strong dynamic support. It has also formed a small double-bottom pattern at around 1,100p level. 

Therefore, the stock will likely bounce back in the coming weeks, and possibly retest its all-time high of 1,420p. However, a drop below the support level at 1,100p will invalidate the bullish outlook and point to a drop below 1,000p.