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Since Tufan Erginbilgic became CEO in 2023, Rolls-Royce‘s (LSE: RR) share price has made one of the most dramatic changes in recent times FTSE history. It has gained nearly 1,155% since that point, more than doubling in the past 12 months alone.
Importantly, however, because the company’s stock price is ultimately driven by earnings growth, there can still be big gains ahead. I believe this is the case, with all three of their core businesses bringing immediate profits and cash flow.
So, how stable do these look and does the stock price look undervalued right now?
The results show growing momentum
Rolls-Royce’s latest results showed strong performance across the group, in line with its ongoing transformation plan.
This is a multi-year change introduced under Erginbilgic to increase margins, strengthen cash flow and simplify the organization. It includes deep cost reductions, strong financial management and a shift to high-quality investments across Civil Aerospace, Defense and Power Systems.
The main risk is any major product failure, which can be very expensive to repair and damage the company’s reputation.
However, its H1 2025 numbers published on 31 July saw operating profit rise 51% year-on-year to £1.7bn. Operating margins jumped from 14% to 19.1%, while free cash flow rose 37% from £1.16bn to £1.58bn.
As a result, the company raised its full-year 2025 guidance for operating profit to £3.1bn-£3.2bn and £3bn-£3.1bn for free cash flow.
The 2024 numbers released on February 27 also showed strong progress across the board. Underlying operating profit rose 55% to £2.46bn, while operating margins rose from 10.3% to 13.8%. Meanwhile, free cash flow rose by 89% to £2.43bn.
Drivers of forward growth
Rolls-Royce appears well positioned to maintain its earnings momentum, supported by several clear growth drivers across its core divisions.
Civil Aerospace should benefit from increased aircraft utilization and a strong pipeline of long-term service agreements. The Trent XWB-97 engine is still in high demand among carriers, with upgrades extending flight time and improving profitability.
Defense products continue to see strong demand, with 5 December marking a £400m strategic partnership between Rolls-Royce Submarines and NATO partner firms.
And its Power Systems division is set to deliver further margin expansion through price and efficiency gains. The November 13 update highlighted strong order and revenue growth driven by data centers and government customers. In October, a gas generator was introduced with a quick start, available from 2026.
Alongside these near-term drivers, Rolls-Royce’s Small Modular Reactor program offers a potential long-term growth option. Industry forecasts are for the global SMR market to reach $72.4bn (£53.8bn) by 2033 and $295bn by 2043. This represents a compound annual growth rate of 30% over this period.
My investment idea
Despite significant gains over the past two years, Rolls-Royce’s price tag still lags behind its competitors in terms of core revenue.
It trades at 16.6 times earnings, compared to a peer average of 30.9. These include Northrop Grumman on 20.2, BAE Systems on 25.8, RTX at 37.3, too TransDigm in 40.1.
Therefore, it is highly underestimated on this basis.
Given this, and its strong earnings outlook, I will be adding to my holdings in the company in the near future.
I also have my eye on some stocks with high earnings growth forecasts that look undervalued as well.
