Investors love Rolls-Royce again but caution flags still fly
Rolls-Royce shares are cruising near all-time highs, capping off a spectacular turnaround that has stunned even longtime observers.
The FTSE 100 stalwart has rallied more than 850% over three years, driven by surging civil aerospace activity, heightened defense spending, and a CEO not afraid to set—and revise upward—ambitious financial targets.
For corporate watchers, the company offers a revealing case study: the anatomy of a recovery narrative that markets believe in, at least for now.
A business that was bleeding cash during the pandemic is now chasing margin expansion and market share across three verticals: civil aerospace, defense, and power systems.
Under chief executive Tufan Erginbilgiç, Rolls-Royce has cut costs, streamlined its operating model, and reignited strategic ambitions.
That includes a bid to re-enter the short-haul jet engine market and a high-profile pitch to power Britain’s next-generation nuclear reactors.
Investors have responded with fervor. But with a price-to-earnings ratio hovering around 44, expectations are already sky-high.
Forecasts point to £3.6–£3.9 billion in underlying operating profit by 2028, which would put the company’s current market cap at roughly 19x those future earnings. Bullish analysts argue that kind of growth would justify the premium.
But the operative word is “if.” Rolls-Royce still derives much of its income from civil aerospace—a segment that remains vulnerable to geopolitical shock, economic downturn, or renewed climate restrictions.
The Trent 1000 engine, long a sore spot due to reliability concerns, remains a reputational risk.
Even backers of the stock acknowledge the volatility baked into the business model. As one market analyst put it, the “real fireworks may be over,” even if the longer-term outlook remains intact.
Rolls-Royce’s nuclear play, via its development of small modular reactors (SMRs), could be transformative—but it is unproven. Winning the bid to supply Great British Nuclear would be a reputational win and a potential growth lever. But that bet is still in the lab, not the ledger.
Rolls-Royce presents a cautionary tale about how quickly sentiment—and valuation—can turn. The company has executed well and set new financial targets early. That’s earned it credibility in the eyes of the market.