Rolls‑Royce (LSE: RR) shares have risen 1,334% in three years. But this does not mean there is no value left in the stock.
With a swelling order book and multi‑year contracts already locked in, the growth momentum behind the business looks far from finished.
So where does the firm go from here?
What’s the latest update?
Rolls‑Royce reaffirmed guidance for 2026 of £4.0bn-£4.2bn in underlying operating profit and £3.6bn-£3.8bn in free cash flow in its 30 April-released Q1 trading update. And the details show exactly why management is so confident.
Civil Aerospace is seeing powerful momentum, with large‑engine flying hours already at 115% of 2019 levels. Growth in large-engine equipment deliveries jumped 18% year on year, and growth in large-engine shop visits rose 12%. Major new orders came in, including 40 Trent XWB‑97 engines for Atlas Worldwide and over 60 engines for Delta.
Defence is benefiting from a surge in demand, highlighted by orders for Türkiye’s 20 Eurofighters and gas turbines for Australia’s new frigates. And March saw the beginning of collaboration with Boeing on the next stages of the US Air Force’s B-52s. These will be refitted with Rolls-Royce’s F-130 engine.
Power Systems is also booming, with order intake across gas and diesel engines around 50% higher year on year. As a result, the division’s order backlog stood at £7.3bn. In April, Rolls-Royce small modular reactors (SMR) finalised and signed the contract with GBE-N to supply the UK with three SMRs. Commercial terms were also signed with the ČEZ Group for the first of up to six SMRs in the Czech Republic.
How good were the full-year results?
All the major growth drivers were evident in the full-year 2025 results released on 26 February. One risk to these is any slowdown in global travel demand that would affect aftermarket aerospace revenues and cash generation. Another would be delays or cost overruns in any of its new systems that could impact earnings and cash flow.
However, 2025’s operating profit soared 41% year on year to £3.5bn, reflecting stronger large‑engine aftermarket performance and improved commercial terms. Meanwhile, revenue jumped 14% to £20.1bn, driven by higher shop‑visit volumes in Civil Aerospace, robust Defence demand, and powerful growth in Power Systems.
Free cash flow surged 35% to £3.3bn, supported by continued long-term service agreement balance growth and disciplined working‑capital management. The operating margin expanded from 13.8% to 17.3%, underlining the impact of cost‑efficiency initiatives and commercial optimisation.
Together, these results highlight a business delivering structurally higher profitability and cash generation. And further gains are expected as these underlying drivers continue to compound.
My investment view
Despite its recent price rise, Rolls‑Royce still looks very undervalued at a price‑to‑earnings ratio of 17.7 against its peers’ average of 28.5. These firms comprise Northrop Grumman at 17.2, BAE Systems at 27.4, RTX at 32.9, and TransDigm at 36.4. That discount feels increasingly difficult to justify given the company’s accelerating margins, swelling order book, and long‑cycle revenue visibility.
Strong core business drivers continue to power earnings, and new growth avenues, such as SMRs, are opening up. These make the business look structurally stronger than at any point in the past decade.
Given these factors, I will be buying more shares very soon. I also think them worthy of other investors’ consideration.
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Simon Watkins owns shares in Rolls-Royce and BAE Systems.
