Rolls-Royce (LSE:RR) shares have returned more than 1,000% in just three years. The gains since mid-September 2020 are even more dramatic — knocking on for 2,000%!
Over the past six months though, the stock’s risen around 11.5%. Not bad, but hardly the pulsating performance we’ve been used to since CEO Tufan Erginbilgiç turned up and extinguished the flames of the ‘burning platform’ that was (in his view) Rolls-Royce.
Even the FTSE 100 has done better in the last six months, rising around 13.3%. Arguably then, what we Rolls-Royce shareholders are lacking is a catalyst to (hopefully) fire up the engines again.
Will we get one on 26 February when the company releases its 2025 results?
On track
The last time the engine maker reported (Q3) earnings in November, the stock stumbled for a while before recovering in the days after. In the report, management confirmed that it remained on track to hit the full-year target for underlying operating profit of £3.1bn-£3.2bn.
Large engine flying hours for the 10 months to 31 October 2025 increased 8% year on year, reaching 109% of 2019 levels. It secured major orders from airlines such as IndiGo and Malaysia Airlines. Defence demand remained “robust“.
The market currently expects 2026 revenue to grow around 10% to £21.7bn, with earnings per share (EPS) increasing roughly 13%.
We might see a bit of small modular reactor (SMR) revenue trickle in this year, but these ‘mini-nukes’ won’t contribute materially until the early 2030s. Certainly not from an earnings perspective.
Expectations are high
Stepping back, I think we’ve reached a stage with the stock where only truly stellar earnings will send it flying.
Were the firm to raise its mid-term guidance for underlying operating profit of £3.6bn-£3.9bn and free cash flow of £4.2bn-£4.5bn, the share price could rapidly surge back above 1,300p. And then onwards and upwards from there.
On the other hand, if Rolls-Royce merely reaffirms this medium-term target, the stock could sell off as investors take profits. After all, expectations are high and the tremendous multi-year run has left the stock highly valued at 37 times forward earnings.
For context, that’s well below Nvidia‘s forward earnings multiple of 23. The AI chipmaker’s expected to post 50%+ growth in revenue and EPS in 2026.
In other words, Rolls-Royce stock is priced for perfection, but even perfection might not be enough to send it rocketing higher. The average 12-month price target among analysts is just 9.9% above the current level.
Holding tight
Whatever happens on 26 February, I won’t be selling any of my Rolls-Royce shares. There are still strong medium-term catalysts, including European re-armament, SMRs, rising long-haul travel, time-on-wing improvements, and re-entering the narrow-body jet engine market.
Between now and then though, I’m expecting a fair bit of volatility, especially if the company fails to live up to market expectations. Were the stock to nosedive later this month, it might then be worth considering.
As for me, I’m not going to buy any more shares around £12. Instead, I’m tentatively combing through the software sector massacre — the so-called SaaS Apocalypse — to find opportunities there.
Compared to software, Rolls-Royce is an oasis of peace.
