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Rolls-Royce (LSE:RR) shares have returned more than 1,000% in just three years. Profits from mid-September 2020 are even more amazing – knocking 2,000%!
Over the past six months, however, the stock is up about 11.5%. Not bad, but the efficiency we are used to since CEO Tufan Erginbilgiç came out and put out the flames of the ‘burning platform’ that was (in his opinion) Rolls-Royce.
Even with FTSE 100 it has done better in the last six months, up about 13.3%. Arguably, what we Rolls-Royce shareholders are missing is a catalyst to (hopefully) fire up the engines again.
Will we find out on the 26th of February when the company releases its 2025 results?
It’s on its way
The last time the engine maker reported (Q3) earnings in November, the stock stumbled briefly before recovering in the following days. In the report, management confirmed that a full-year operating profit target of £3.1bn-£3.2bn remains on target.
Main engine flight hours in the 10 months to 31 October 2025 increased by 8% year-on-year, reaching 109% of 2019 levels. It has received huge orders from airlines like IndiGo again Malaysia Airlines. The need for protection remained “be strong“.
The market currently expects 2026 revenue to grow by around 10% to £21.7bn, with earnings per share (EPS) rising by around 13%.
We may see a slight decrease in modular reactor (SMR) revenue this year, but these ‘mini-nukes’ won’t contribute significantly until the early 2030s. Certainly not from an income perspective.
Expectations are high
In retrospect, I think we have reached a stage where the stock is only doing well.
If the company were to raise its mid-term guidance to an underlying operating profit of £3.6bn-£3.9bn and free cash flow of £4.2bn-£4.5bn, the share price could quickly rise back above 1,300p. And it’s onward and upward from there.
On the other hand, if Rolls-Royce simply confirms this medium-term target, the stock could sell off as investors take profits. After all, expectations are high and the multi-year run has left the stock valued at a whopping 37 times forward earnings.
In context, that’s below Nvidia23 times previous profits. The AI chip maker is expected to ship 50%+ revenue growth and EPS in 2026.
In other words, Rolls-Royce stock has the price of perfection, but even perfection may not be enough to send it higher. The 12-month price average among analysts is just 9.9% above the current level.
Holding on
Regardless of what happens on 26 February, I will not be selling any of my Rolls-Royce shares. There are still strong medium-term catalysts, including European rearmament, SMRs, increased long-range, overtime development, and re-entry into the thin-body jet engine market.
Between now and then, I expect little volatility, especially if the company fails to meet market expectations. If the stock were to drop later this month, it might be worth considering.
I, for one, will never buy another £12 share. Instead, I try to cover the slaughter of the software industry – the so-called SaaS Apocalypse – to find opportunities there.
Compared to software, Rolls-Royce is a place of peace.
