Rolls-Royce (LSE:RR) shares have staged one of the most remarkable turnarounds on the UK stock market. And analysts believe the recovery still has ‘some’ legs.
Of the 18 analysts currently covering the shares, 14 rate the stock a Buy or Strong Buy. Meanwhile, only four have it on Hold. None have the stock at Sell.
That level of consensus reflects growing confidence in the company’s earnings power following years of restructuring and operational fixes.
Looking ahead to 2026, forecasts suggest further progress. Consensus estimates point to net profit rising from £2.36bn in 2025 to £2.71bn in 2026, with earnings per share increasing from 28.2p to 32.6p.
Dividends are also expected to grow meaningfully, from 9p to 11p per share. This reinforces the view that Rolls-Royce has moved firmly out of survival mode and into capital-return territory.
That said, expectations are already high. The average analyst price target sits at 1,195.7p, only around 4% above the current share price, suggesting much of the near-term appreciation may already be priced in.
Recent forecast revisions have been modestly positive, with upward tweaks to profit estimates over the past three months, but limited changes to earnings per share assumptions.
In short, analysts expect Rolls-Royce to keep delivering earnings growth into 2026. The challenge for investors is that the stock now needs execution — not just recovery — to drive further share price gains.
The valuation conundrum
The valuation is now the key conundrum. On the figures above, Rolls-Royce trades at around 40.8 times forward earnings, a level more commonly associated with high-growth technology stocks than industrials.
That multiple is broadly comparable to US peer GE Aerospace, suggesting the market is already pricing in sustained execution and further margin expansion.
Normalised EPS is forecast to rise from 28.2p in 2025 to 32.6p in 2026, but with a price-to-earnings-to-growth (PEG) ratio above 2.5, investors are paying a hefty premium for that growth.
A £1.1bn net cash position strengthens the investment case, yet at this valuation, future returns depend on exceeding — not merely meeting — expectations.
Another catalyst
In my view, the shares now need a new catalyst to move materially higher. That catalyst is unlikely to come from Rolls-Royce’s three core operating divisions — civil aviation, power systems and defence — all of which are already performing exceptionally well and largely embedded in current forecasts.
Instead, the more interesting prospect lies in small modular reactors (SMRs). Rolls-Royce is one of the few Western groups with credible nuclear engineering capability, regulatory progress, and government backing.
While SMRs contribute almost nothing to current sales, even modest contract wins could materially shift long-term expectations. At today’s valuation, it’s this nuclear potential — rather than further execution gains — that could justify another leg higher.
For me, Rolls-Royce shares are still worth considering. However, my investment model typically wouldn’t let me buy more.
