💡 Core Investment Thesis
Rolls-Royce represents a high-conviction turnaround story, surging 80% over 12 months on the back of aerospace recovery and defence spending tailwinds. Under CEO Tufan Erginbilgiç’s restructuring, it combines operational leverage with strategic repositioning – yet U.S. tariff risks and execution challenges demand vigilance.
📊 Financial Health & Performance
2024 Highlights
- Revenue: £18.9 billion (15% year-on-year growth)
- Operating profit: £2.9 billion (50% surge, margins at 13.8%)
- Cash flow: Free cash flow doubled to £2.4 billion
- Balance sheet: Shifted to net cash position (£475 million)
2025 Outlook
- Operating profit guidance: £2.7–2.9 billion
- Free cash flow target: £2.7–2.9 billion
- Shareholder returns: Reinstated dividend (0.7% yield) + £1 billion buyback
✈️ Growth Catalysts
Civil Aerospace Dominance
- Flight hours at 110% of pre-pandemic levels
- Aftermarket revenue boom from engine servicing
- New engine deliveries accelerating
Defence Expansion
- NATO spending hikes driving submarine/aircraft orders
- UK facility expansion for nuclear submarine programmes
Power Systems Momentum
- Data centre backup power demand surge
- Book-to-bill ratio of 1.5× signalling strong future revenue
⚠️ Key Risks
Tariff Exposure
- U.S. 50% steel/aluminium duties threaten supply chains
- Potential 10–15% margin erosion if unresolved
Execution Challenges
- UltraFan engine delay (25% efficiency gain postponed to 2030s)
- Small modular reactors unproven at scale
Valuation Sensitivity
- Trading at 25× P/E (above sector average)
- Vulnerable to growth stumbles or defence contract delays
📈 Valuation & Projections
- Current share price: 866 pence
- Consensus price target: 870 pence (range: 240p–1,150p)
- Bull case (1,150p): Defence boom + tariff resolution
- Bear case (240p): Growth slowdown + margin compression
Total Return Scenarios
- Base case: 15% upside (1,000p) + dividend
- Bull case: 30%+ with accelerated aerospace demand
- Bear case: -40% if tariffs escalate
🎯 Investment Recommendation
Accumulate Below 800p for Asymmetric Upside
- Entry strategy: Buy dips below 800p; hedge with puts if U.S.-UK trade talks stall
- Catalysts to monitor:
- H2 2025 defence contract awards
- July U.S. tariff decision clarity
- Free cash flow sustainability confirmation
Bottom Line: Rolls-Royce is a reindustrialisation play with unmatched aerospace/defence exposure. Its cash flow resurgence and buybacks provide downside protection, but tariff headwinds necessitate disciplined entry points. Patient investors could capture 20%+ annualised returns.
Is Rolls-Royce’s 25× P/E justified given its defence growth runway?
How will U.S. tariffs reshape UK industrial strategy?
Can nuclear/reactor divisions offset aerospace cyclicality long-term?
Disclaimer: Not financial advice. Conduct your own due diligence.