Why Has Rolls-Royce Stock Done So Well?19 Mar 2025 20:32
Why Has Rolls-Royce Stock Done So Well?
UK-based Rolls-Royce is famous for making jet engines, which it supplies to aviation manufacturers like Airbus AIR and Boeing BA.
In 2023, less than a third of its underlying revenue came from defense projects, totaling just over £4 billion. By the end of 2024, the company’s defense order book had reached a record £9.2 billion, amid the AUKUS submarine defense pact and a deal to supply F130 engines for the US Air Force’s ageing fleet of B-52 bombers.
This order book has contributed to a stock turnaround Muharremi says is “dramatic.”
“Under chief executive Tufan Erginbilic’s leadership, Rolls-Royce has repositioned itself as a financially strong, high-margin, and cash-rich aerospace and defense leader,” she says.
“The reinstatement of the dividend, buyback program, and accelerated transformation reinforce its commitment to long-term value creation.”
In 2019, Rolls-Royce stock was struggling. Shares were already on a downward tear when the pandemic unfolded in late December 2019 and early 2020, but the company then endured additional falls when governments restricted travel in March of that year.
It wasn’t until three years later that Rolls-Royce really started to make progress again. By the end of 2024, it was the UK’s third top-performing stock of the calendar year, delivering an 89.72% return to investors. Today, owners of the stock are still looking back on a superb 12 months. Since March 2024, Rolls-Royce stock is up 103.95%.
“Since the pandemic, Rolls-Royce has significantly improved profitability, margins, and free cash flow, achieving targets two years ahead of expectations thanks to an industry recovery and operational and strategic improvements including optimization of long-term service agreements, improved time-on-wing for its engines, renegotiated contracts, and restructuring its cost base.”
Earlier this month, the company met its mid-term targets two years early, leading Muharremi to raise Morningstar’s fair value estimate for Rolls-Royce stock to £9.60. Its stock currently trades at around £7.97, meaning it is undervalued and potentially an attractive investment. Increased defense spending in the UK and on the continent remains a tailwind for the company.
“We have increased defense revenue projections as we now expect European defense spending to reach 3.1% of gross domestic product by 2029, up from 2.4%, and 3.5% by 2032 (previously 2.8%),” Muharremi says.
https://www.morningstar.co.uk/uk/news/262281/european-defense-stocks-have-surged-are-they-still-a-buy.aspx
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