We look at Rolls-Royce and whether, after a sterling rally from the pandemic lows, the engine maker’s shares have reached their cruising altitude.
Rolls-Royce shares have gained 5% year-to-date, compared with the FTSE 100’s return of just over 3%. Contrast this with Rolls-Royce’s 1,070% appreciation over five years, compared with an index that added 46% over the same period; the stock seems to have reached a plateau.
Yes, the Middle East conflict is weighing on shares, but looking at the bigger picture, the Rolls-Royce valuation seems to have caught up with the ambitious growth targets set out in the early stages of the CEO’s tenure.
That said, Rolls-Royce still presents a compelling growth case underpinned by three structurally expanding divisions.
The investment thesis still hinges on Civil Aerospace, where the aftermarket dynamic remains the principal earnings driver. Large engine flying hours reached 115% of 2019 levels in the first quarter and are guided to 115%–120% for the full year, with Middle Eastern Trent XWB activity already fully recovered to pre-conflict levels.
The 12% growth in large engine shop visits, alongside 18% growth in original equipment deliveries, points to a maturing installed base that should convert into recurring high-margin service revenue over the coming decade.
Order momentum is strong. New commitments from Atlas and Delta, and the repositioning of the Trent 1000 XE as an order-winning engine, provide revenue visibility into the future.
Defence provides a defensive growth anchor, with more than 20% growth in OE deliveries and a pipeline spanning Eurofighter, the B-52 re-engining and next-generation autonomous propulsion.
Does this justify its forward price-to-earnings ratio of 33x? Some would argue not.
However, the optimists will look to Power Systems division and the potential to play a part in the race to power AI compute. Power generation order intake has increased by around 50% year-on-year, led by data centres and government demand, with a record month of orders in March, lifting the backlog to £7.3bn. This positions the division as a direct beneficiary of structural electrification and AI-driven power demand, themes likely to sustain elevated order intake.
This in itself makes Rolls-Royce exciting enough to include in a portfolio. But we’ll need to see additional traction here for Rolls-Royce to ascend into the stratosphere. Compared to post-pandemic lows, that is.