Gravity-defying is an apt description of shares in Rolls-Royce. The aero-engineering company’s value recently hit £100billion, in the wake of US President Donald Trump’s policy change on Ukraine.
The price may have slipped a little, but over the past three years it has leapt by 1,594 per cent to stand at 1,190p – to the delight of thousands of private investors who have backed this British success story.
The 106 per cent increase in the shares since the start of January has, by far, outpaced the FTSE 100, even though the index has been hitting record highs in recent days. The performance of Rolls-Royce’s stock reflects the turnaround at the Derby-based company whose shares tumbled to as low as 35p in 2020 when the pandemic forced planes to be grounded.
The company is worth £98.8billion, making it the fifth-largest name in the FTSE 100, after AstraZeneca, HSBC, Shell and Unilever.
This new elite status is the result of Nato countries ramping up defence spending in response to war in Ukraine and mounting geopolitical tensions elsewhere. There’s also been a rebound in holiday travel by plane.
This means more demand for Rolls-Royce engines from manufacturers of civil and defence aircraft like Airbus and Boeing – despite the issues that have dogged some of these engines for more than a decade and are appearing in some cases with newer models.
Influence: Tufan Erginbilgic has turned the firm’s fortunes around since taking over
At the same time, the US tech titans are laying out billions to win the artificial intelligence (AI) race. This is fuelling a data centre construction boom, spurring extra demand for Rolls’s back-up power generators.
Rolls-Royce is gearing up to feed for data centres’ voracious appetite for energy.
The company already makes reactors for nuclear submarines but will be building three small modular reactors (SMRs) – at the cost of about £1.5bn each – for the Government.
This week brokers UBS predicted that Rolls-Royce shares could have further to go, setting a target price of 1,350p. There is even talk of 2,000p, which would endow Rolls-Royce with the kudos of being ‘a £20 share’.
Backing Rolls-Royce is a bet on Britain – and on an uncertain world, where conflict and tensions are mounting, meaning more defence expenditure. It is also a gamble on families prioritising a sunshine getaway by plane in tough times. Here’s what you need to know.
THE TUFAN EFFECT
CHIEF executive Tufan Erginbilgic believes that nuclear could turn Rolls-Royce into the number one member of the FTSE 100 – a role occupied by AstraZeneca whose market capitalisation is £193billion. In August Erginbilgic told the BBC: ‘There is no private company in the world with the nuclear capability we have. If we are not the market leader globally, we did something wrong.’
These confident pronouncements are in marked contrast to the mood when Erginbilgic, a former BP top manager, took over at Rolls-Royce in 2023. In a now-famous phrase, he called the battered firm a ‘burning platform’.
The speed he deployed in putting out the flames led to his nickname ‘Turbo Tufan’.
Late last year, he spelled out his aim to turn Rolls-Royce into ‘an execution machine’, in pursuit of his 17 strategic initiatives for the business. These initiatives seem not to have been separately listed anywhere, but the seriousness of Erginbilgic’s intent can be seen in the company’s management line-up. Rolls-Royce has a CTO – chief transformation officer – Nicola Grady-Smith.
THE FLIGHT PATH
The huge leap in the share price since Erginbilgic’s arrival – up 991 per cent – has not been sufficient to satisfy his ambitions.
At present Rolls-Royce dominates the wide-body jet market, thanks to its family of Trent engines. But Rolls-Royce will be moving into the $1.6 trillion market for narrow-body engines. This week it was revealed that Rolls-Royce was in discussion with Boeing which requires engines for its planned replacement to its 737 Max model.
Erginbilgic also wants Rolls-Royce to lead the worldwide market in SMRs which is tipped to be worth $1 trillion by 2050.
THE NUMBERS
The fruits of Erginbilgic’s efforts were on show in Rolls-Royce’s half-year results which observers declared to be ‘high-flying’.
As travellers took to the skies, revenues were 11 per cent up on the same period of 2024 at £9.1billion, while operating profit was 41 per cent above expectations at £1.9billion.
Rolls-Royce raised its full-year operating profit forecast to £3.1billion-£3.2billion. The free-cash flow estimate is £3billion-£3.1billion which, if achieved, would be an indication of great financial health. The company makes most of its money from maintaining and servicing its engines, based on the time that those engines spend in the air. In the first half of the year, EFHs (engine flying hours) were at 109 per cent of 2019 levels which cheered investors. But Aarin Chiekrie of Hargreaves Lansdown said that EFHs are not guaranteed to continue their upward trajectory, given the engine issues that led to the cancellation of holidays at the end of 2024.
He said: ‘Attempted fixes are in the pipeline, but if the group can’t iron out these issues, it could eat into future profits.’
BLUE SKIES AHEAD?
Rolls-Royce is the top holding at the Invesco Global Equity investment trust. Stephen Anness, Invesco’s head of global equities, said: ‘The outlook remains bright, as free cash flow generation continues to grow. Management is ahead of schedule on key initiatives, and the business is well positioned to fund future growth from areas like narrow body engine programmes. The share price may have moved up. But we can still forecast a good total return for this business.’
Only one of the 17 analysts that follow Rolls-Royce rate the shares a ‘sell’. Among the rest, ten have a ‘buy’ recommendation, while six think the shares are a ‘hold’ or will outperform their sector.
Despite the confidence in the prospects, you should be ready for some turbulence ahead if you buy now or opt to stay invested. Rolls-Royce may not be a thrill-ride share, but the journey could have unsettling periods.
OTHER HIGH-FLIERS
If you want more of a stake in the booming aero-engine sector, the £237billion GE Aerospace group is one option. This business was spun last year from the break-up of GE, the US conglomerate that came to grief in the global financial crisis of 2008.
GE was rescued by Larry Culp, who heads GE Aerospace and appears to be almost as admired as Erginbilgic.
Gerrit Smit, manager of the Stonehage Fleming Global Best Ideas Equity fund calls Culp ‘a world-class corporate leader’.
GE Aerospace makes a very good income from servicing its 70,000 engines installed in planes. It is also the leading player in the narrow-body engine sector through CFM International, its partnership with the French group Safran.
Its shares have increased by 80 per cent this year to $301 (£224). This may not equal the rise at Rolls-Royce, but analysts are similarly positive about the prospects, rating the shares a ‘buy’. This month brokers Jefferies raised their target price to $350 (£260).
Safran shares have also prospered this year, up by 44 per cent to €304 (£265). Safran aspires to double its defence revenues which come from missiles, navigation systems and ‘eyes in the sky’ optronics technologies. The average analysts’ target for the shares is €340 (£296).
Again, it may be up, up and away for these shares. But still be prepared for tense moments.
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