On Monday, Citi analysts adjusted their stance on Rolls-Royce Holdings Plc (LON::LN) (OTC: RYCEY), downgrading the stock from a Buy to a Neutral rating, while simultaneously increasing the price target to GBP6.41 from GBP5.55. The revision comes after a period of remarkable recovery, with the stock delivering a 95.43% return over the past year.

According to InvestingPro data, the company has achieved a “GREAT” financial health score of 3.14, reflecting its strong rebound from the Covid-19 pandemic impacts.

The analysts at Citi acknowledged the robust recovery Rolls-Royce (OTC:) has made from the depths of the pandemic, but suggested that the stock is now nearing what they believe to be its current fair value. While they have raised the target price, indicating some potential for growth, they note that the expected upside is not sufficient to maintain a Buy rating.

With a market capitalization of $61.49 billion and trading near its 52-week high of $7.68, InvestingPro analysis suggests the stock is slightly overvalued at current levels.

Rolls-Royce, known for its unique business model, is anticipated to generate cash flow significantly higher than its profits for the foreseeable future. This aspect has led to the company’s shares trading at the upper end of profit multiples when compared to its peers, with a P/E ratio of 20.99. However, on cash flow metrics, Rolls-Royce appears to be less expensive, supported by strong revenue growth of 15.42% in the last twelve months.

Citi’s primary valuation method relies on a Discounted Cash Flow (DCF) approach, which emphasizes the importance of cash over profits. Despite this focus, the analysts remain aware that profit multiples do influence market perceptions. They suggest that this could result in Rolls-Royce trading at a discount relative to its cash fair value, due to appearing more costly in terms of profit multiples.

The updated price target of GBP6.41 reflects a slight increase from the previous GBP5.55, hinting at a modest growth expectation but not enough to encourage continued buying of the stock at its current level. The new rating and price target by Citi provide investors with a revised outlook on Rolls-Royce as the market continues to evolve.

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