Can the Rolls-Royce share price hit 200p in 2023?

Six months ago, we were wondering what to do Rolls-Royce Holdings (LSE: RR.) share price could fall below 50p.

Today, it spiked above 150p and shows no sign of stopping. What a difference a short time can make.

So, is this finally the start of the long awaited recovery? Or are we seeing a dead cat bounce, and maybe Rolls stock is making a comeback?

It pays to look at the bigger picture. The stock price may just rocket. But it still barely exceeds the level it did at the end of 2021.

Volatility

The uptick didn’t last long, and the price dropped again. So be careful and don’t jump in without doing your research first. It could happen again.

But I am optimistic that this could be the start of long-term gains for Rolls-Royce shareholders. After all, stocks are still down 35% since the pandemic. And it’s down 50% in the last five years.

What do I think is different now? I think some uncertainty about the future for the aero engine business is rising.

We need cash

For many years, we have hoped to return to positive cash generation. Then, with the FY22 results released in February, the hopes came true.

Rolls-Royce delivered £505m in free cash flow from continuing operations. And that marked the key turnaround I was waiting for.

I think the company has ended up focusing too much on debt, and reducing it to £1.9bn in 2022. But that has been financed mostly by disposals.

Sustainability

For the trend to be sustainable, we need future reductions in operating cash flow.

The Rolls board expects free cash flow of £0.6bn-£0.8bn in 2023, which will hopefully increase debt.

The guidance is based on large engine flying hours reaching 80-90% of 2019 levels. I would say there is a fair amount of risk, with the current global outlook uncertain.

There is also the risk that the share price may fall again due to profit taking.

Anyone who buys the day before the results are released, gets almost 50% profit. Certainly tempting to cash and pocket some of that.

Remaining debt

Debt is also still a problem. The cash used to pay for it is cash that cannot be spent on research and development of the next generation of machines.

Debt also skews the value of the stock’s base.

Estimates put Rolls-Royce shares at a 2023 price-to-earnings (P/E) ratio of more than 30. That may seem steep.

But if earnings grow as expected, it should be halved to 15 by 2025.

Hit 200p?

How about a £2 share price target? It will raise the forecast P / E from 15 to 19. I still do not see that as too much stretching, especially if the debt falls more by then.

But in the end, I don’t really care what happens in 2023. For me, it’s all about long-term expectations.

And I began to like what I saw.