Rolls-Royce’s (LSE: RR) share price is up 110% over the past 12 months. Since Tufan Erginbilgic took over as its CEO on 1 January 2023, it has risen 1,049%.
Unsurprisingly, some investors wonder whether the stock can rise much further. However, crucially in this context, price and value are not the same thing.
Price is whatever the market will pay for a share at any point. But value is what the stock is truly worth, based on underlying business fundamentals.
So, the key consideration now is not the price at which the stock is trading. Rather, it is whether there is value left in it.
The business’s fundamentals
Since Erginbilgic assumed the top job, Rolls-Royce’s results have been marked by two key elements. First, they have been extremely good. And second, they have tended to significantly understate future earnings prospects and other key measurements.
The last results — H1 2025 – were a perfect case in point.
First, the figures themselves were excellent – year-on-year revenue increased 11% to £9.057bn and operating profit jumped 51% to £1.733bn. Operating margin rose 36% to 19.1% and earnings per share soared 76% to 15.74p.
And second, the forecasts – although upgraded from before – still looked extremely understated. For example, its full-year 2025 underlying operating profit guidance was upgraded from £2.7bn-£2.9bn to £3.1bn-£3.2bn. But H1 2025’s figure was already £1.733bn, implying a full-year number of £3.466bn, already ahead of the forecast.
The same applies to the free cash flow forecast. This was increased from £2.7bn-£2.9bn to £3.0bn-£3.1bn. However, H1 2025’s number was already £1.582bn, implying a full-year figure of £3.164bn.
Similarly, the mid-term (end-2028) upgraded guidance looks as though it is under-promising to over-deliver. Indeed, investment bank Morgan Stanley highlighted that all three Rolls-Royce divisions are already operating within the 2028 margin guidance range.
Fellow investment bank UBS said: “We believe it [Rolls-Royce’s upgraded guidance] will be taken as conservative.”
Even Erginbilgic himself said: “We see these targets as a milestone, not a destination.” He added: “We are continuing to expand the earnings and cash potential of Rolls-Royce.”
Further Growth Drivers
A risk to Rolls-Royce’s earnings would be a major failure in any of its key products, which could be costly to fix.
That said, several areas represent significant future growth channels for Rolls-Royce.
In civil aerospace, increased time on the wing (TOW) and spare engine sales boosted operating margins to 24.9% from 18%. ‘TOW’ refers to how long an engine can function before requiring maintenance or a shop visit. Rolls-Royce expects continued growth here, driven by strong large engine aftermarket performance, contractual margin improvements, and higher spare engine profit.
The same applies to its Power Systems division, which saw a rise in operating margin to 15.3% in H1 from 10.3% the year before. The firm sees further strong growth coming from power generation, notably in data centres and governmental contracts.
And in its Defence division, Rolls-Royce forecasts a 14%-16% operating margin in the mid-term, against 2024’s 14.2%.
My investment view
I came relatively late to the Rolls-Royce share price party, buying them initially at just over £6 a while back.
That said, I have added to my holding several times since then, based on the firm’s strong growth forecasts.
As I believe these remain firmly intact, I will buy more of the stock very shortly.
