The equity of Rolls-Royce continues its impressive ascent in 2025, having appreciated by approximately 91% since the start of the year and ranking among the leading performers on the FTSE 100 index. Market observers note a crucial distinction from previous rallies: the current surge is underpinned by concrete orders and robust financial performance rather than mere speculation. This raises a pivotal question regarding the durability of the company’s recovery.
A Turnaround Bolstered by Credit Upgrade
A significant endorsement of the engineering group’s financial health came in late November when Moody’s elevated its long-term credit rating from Baa2 to Baa1, maintaining a positive outlook. The agency highlighted Rolls-Royce’s operational strength, the successful restructuring under CEO Tufan Erginbilgiç, and its solid net cash position. Available liquidity stands at around £8.3 billion, comprising £5.8 billion in cash and an undrawn credit facility of £2.5 billion.
Further reinforcing management’s confidence, a £1 billion share buyback program announced in February was nearly 90% complete by mid-November. This marks the first capital return to shareholders since the pandemic and serves as a clear signal of belief in the firm’s future earnings potential.
Defense Sector Delivers a Landmark Contract
A major catalyst for the positive sentiment is a substantial defense contract. The arms corporation KNDS has placed an order for more than 300 mtu MB 873 Ka-501 engines destined for new Leopard 2 main battle tanks. This represents one of the largest single orders in the recent history of Rolls-Royce’s Power Systems division.
Deliveries for this contract are scheduled to commence in 2026. The engines will be supplied to several NATO member states, including Germany, Lithuania, Sweden, the Netherlands, and the Czech Republic. Government contracts already account for roughly 25% of the Power Systems unit’s revenue, a proportion that is expected to grow as European nations increase defense spending, a trend from which Rolls-Royce is positioned to benefit.
All Core Divisions Are Contributing
The company has reaffirmed its financial guidance for 2025, projecting an underlying operating profit in the range of £3.1 to £3.2 billion and a free cash flow between £3.0 and £3.1 billion. This performance is being driven by strength across all three main business segments:
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- Civil Aerospace: Robust demand for large aircraft engines, with recent orders from carriers such as IndiGo and Malaysia Airlines, as well as from aircraft lessor Avolon.
- Defence: Elevated defense expenditures among NATO allies are fueling growth in this division.
- Power Systems: Momentum is being sustained by demand from data centers and military contracts.
Analyst Sentiment Remains Bullish
Despite the significant share price advance, brokerage analysts maintain an optimistic stance. JP Morgan assigns a fair value estimate of 1,320 pence, while Morgan Stanley’s target is 1,280 pence. In November, RBC Capital Markets initiated coverage with an “Outperform” rating and a 1,275 pence price objective, suggesting that the civil aerospace portfolio alone justifies approximately 70% of the current market capitalization.
The consensus price target among analysts covering the stock falls between 1,210 and 1,240 pence, implying a further potential upside of 10-13%. A majority of the 18 analysts monitoring the equity currently recommend buying.
Valuation Reflects High Expectations
The successful corporate transformation has come at a cost in terms of valuation metrics. The forward price-to-earnings (P/E) ratio now sits at about 35, significantly above the ten-year average of approximately 17. Meanwhile, the trailing P/E ratio of around 16 illustrates the substantial growth in earnings that has already been achieved.
Current market pricing appears to factor in continued growth, strong cash flow generation, and a permanent turnaround. Consequently, there is limited room for operational setbacks, and any disappointment in future results could be met with a sharp market correction.
Forthcoming Catalysts in View
Two key upcoming events are likely to test whether the premium valuation is warranted. By the end of this year, commercial terms for the Small Modular Reactor program with Great British Energy-Nuclear are expected to be finalized. Subsequently, the full-year results for 2025, due in late February 2026, will provide a comprehensive update on the company’s financial trajectory.
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