The British engineering and defense conglomerate Rolls-Royce is entering the new trading year with significant momentum. Building on a robust performance in 2025, the company’s equity continues its upward trajectory. This rally is fueled by expectations of increased defense spending and a substantial ongoing share repurchase initiative. This sustained rise prompts a critical examination of the fundamentals underpinning the current valuation.
Valuation Concerns and a Strategic Buyback
While the share price advances, some analysts urge caution. Morningstar has assigned a fair value estimate of £11.20 per share. Analyst Loredana Muharremi notes the current market price trades significantly above this level, suggesting it already incorporates substantial future growth expectations. Although Morningstar acknowledges the company possesses a “Narrow Economic Moat,” the present valuation appears to reflect an almost flawless operational scenario.
Alongside broader sector trends, a clear company-specific factor is providing support: an active share buyback program. On January 7, 2026, Rolls-Royce repurchased 434,889 of its own shares at prices ranging between 1,244 and 1,268 pence. This transaction is part of a £200 million program. Since this tranche began, the total buyback has reached 1,843,755 shares. Reducing the number of shares in circulation supports key per-share metrics like earnings per share (EPS) and creates additional near-term demand, a move often interpreted by the market as a sign of management’s confidence.
Defense Sector Tailwinds and Record Performance
A primary catalyst for the rally is renewed optimism in the defense industry. Signals from the United States point toward a significant ramp-up in military expenditure. Following reports that former President Donald Trump proposed a massively expanded U.S. defense budget—potentially up to $1.5 trillion—investors are pricing in higher growth prospects for defense contractors.
Approximately one-quarter of Rolls-Royce’s revenue is generated by its Defence division. The market anticipates that rising budgets in the U.S. and among NATO allies will translate directly into increased orders for engines and propulsion systems. Concurrently, the company’s market capitalization, now exceeding £100 billion, reinforces its status as a heavyweight within the FTSE 100 index.
Should investors sell immediately? Or is it worth buying Rolls-Royce?
In London trading, the shares continue their rally, hovering just a few percentage points below recent all-time highs. The stock has recorded a staggering gain of approximately 115% over a twelve-month period, an exceptional performance for a FTSE 100 constituent.
Examining the Fundamental Backdrop
From a fundamental perspective, the ascent is not entirely without foundation. The shares have advanced more than 121% over twelve months. Based on the past twelve months’ earnings, the price-to-earnings (P/E) ratio stands at around 18.6, with earnings per share of £0.683. This does not represent a bargain-basement valuation, but within the global aerospace and defense sector, it is not an extreme level provided anticipated growth materializes.
Operationally, the story is bolstered not only by Defence but also by the Power Systems division. Alongside Civil Aerospace, this unit is considered a key internal growth driver. Chief Financial Officer Helen McCabe has highlighted the “enormous potential” of this segment, offering a narrative beyond short-term defense speculation.
Technically, the chart reinforces the bullish trend. Trading at approximately €14.94, the share price sits comfortably above the 200-day moving average of €12.02 and significantly surpasses the medium-term average of €13.20. This indicates a well-established upward trend, even as the Relative Strength Index (RSI) reading of around 41 suggests the stock is not in overbought territory.
The Upcoming Catalyst
The next major test for the rally is already scheduled. On February 26, 2026, Rolls-Royce will publish its full-year results. This report will reveal whether margins, order intake, and forward guidance can justify the current valuation premium. In the near term, two factors are likely to dictate price action: the specific details of finalized U.S. and NATO defense budgets, and whether the powerful 12-month rally triggers significant profit-taking or if new orders and solid financial metrics validate the elevated share price.
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