What caused the one-day surge? And is it a sign of things to come for the stock? Or is this simply a one-off event that investors should shrug off?

Impact

To explain what happened, we first need to unravel the impact of the conflict in Iran. The 2026 war is affecting companies all over the globe, but few so peculiarly as Rolls-Royce.

On the surface, the heightened tensions might boost the firm’s Defence division. Other British defence stocks like Babcok and BAE Systems have seen an uplift in recent months too.

But the greater issue for Rolls-Royce is the impact of the war on civilian flights and, to a lesser extent, the economy and inflation. A prolonged conflict (along with pricier jet fuel) means fewer flying hours – and that means less cash coming in for maintenance on the engines it sells. A weakened global economy and rising inflation hurt too. This is why the share price is down 19% since the start of the conflict.

That’s why one of the main reasons for the single-day surge was the ‘Trump effect’ of suggesting the war could come to a close soon. The president hinted the war might be ending in the near future (and let’s hope he’s right on that front).

There was more good news on the day as well though…

Notable developments

Another development to note was an order that Rolls-Royce called “one of the largest military orders in the company’s history”. The basic details are that Rolls-Royce will be supplying power packs for 200 personnel carriers for the German military. Such vehicles need reliable power in the most demanding conditions, and that’s where the company’s hi-tech engineering comes in.

This has just been one of a long string of defence orders in recent months for Rolls-Royce. I think it demonstrates two things. Firstly, that governments are starting to get serious about making good on spending commitments to increase the size of their militaries in response to growing threats. And secondly, that the FTSE 100 engineering firm could be set to benefit for years.

I think it’s worth mentioning the boost was also coming on the back of a number of recent broker upgrades and perhaps even the brilliant full-year results in February.

To sum up? It was a great day last week for Rolls-Royce shares, but long-term investors should be looking at longer periods. I think this stock could be one to consider buying for many years and decades.

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However, the price recovered rapidly this morning following news of a ceasefire agreement in the Middle East.

That may not seem like a huge difference in the greater scheme of things, since the shares are up 94.8% since last April. But considering the top three worst-hit shares on opening were defence-related companies, it’s worth a closer look.

A broader issue

Aside from BAE Systems, UK defence shares in general have been slipping even as the Middle East conflict drags on. In the US, defence stocks have also lagged the market, possibly due to increasing uncertainty regarding the outcome of the conflict.

With valuations already high, shaken confidence has now pushed key US aerospace and defence ETFs down between 11% to 16%. Key US constituents like Raytheon and Lockheed Martin are down 4% to 5% in the past month.

In short, the market may have grown a little too enthusiastic about higher military spending. Now that there’s talk of truces and peace deals, some of that enthusiasm is leaking out, even if the conflict remains unresolved.

No need to panic

Unlike many defence-specific stocks, Rolls-Royce doesn’t rely entirely on military spending. Its commercial jet engines and power systems have helped it become one of the UK’s biggest comeback stories. 

Over the past few years, the shares have delivered over a 1,000% total return as the recovery gathered pace. Yes, they’ve fallen almost 20% from a recent all-time high — but that’s to be expected after such a parabolic rally.

After a run like that, even mildly bad news or uncertainty can trigger profit‑taking. Investors who bought earlier may simply be cashing in, especially when they see global defence stocks rolling over at the same time.

Numbers don’t lie

The recent drop doesn’t mean the business is suddenly struggling. In 2025, Rolls-Royce delivered underlying operating profit of about £3.5bn, with a healthy margin of 17.3%, and free cash flow of £3.3bn.

It finished the year with net cash of £1.9bn on the balance sheet — a big shift from the dark days of the pandemic.

Management is guiding for up to £4.2bn of underlying operating profit and £3.8bn of free cash flow in 2026, and has lifted its 2028 targets again. It also reinstated its dividend in 2025, paying a total of 9.5p per share and targeting a 30% to 40% payout of underlying profits.

Sure, the yield isn’t exactly mindblowing at 0.9%, but that’s hardly surprisingly after such huge price gains.

The fact that it’s planning to spend £7bn–£9bn in buybacks until 2028 is proof alone of its dedication to shareholders.

My verdict

In the short term, Rolls’ inflated valuation poses a risk. Future earnings now rely more than ever on healthy airline travel — an area already at risk from rising oil prices.

The conflict may have initially given the shares a boost but the longer it drags on without a permanent ceasefire, the worse things could get.

Still, for a long‑term growth investor, I still think Rolls-Royce is worth considering. It’s hardly the kind of company to collapse from a small hiccup — but there may be some volatility before things smooth out.

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However, the range of price targets for this particular FTSE 100 company is vast. One analyst believes it will rise 46% over the next 12 months, to £17.40 per share. Another one thinks the engineer will fall as much as 24%, to 900p.

So which one might be proved right? Or might both be wrong?

The case for £17.40

Rolls-Royce’s share price has rocketed 87% over the last year, and 965% over five. The reason? A strong record of consistently beating profit and cash flow expectations. It beat analyst targets again in February when it announced underlying operating profit of £3.5bn in 2025, up 38%, and raised this year’s forecasts too.

It faces strong competition, but robust end markets and strong execution mean the FTSE firm continues to impress. This has also allowed the business to step up share buybacks, more of which could follow to give the share price an added bump.

With its successful streamlining programme continuing, it’s possible Rolls could continue wowing investors. A bright outlook for its Civil Aerospace and Defence units also suggests another strong year ahead.

Why Rolls shares could drop to 900p

Yet past performance isn’t a reliable guide to the future. And with an escalating conflict enveloping the Middle East, risks to earnings and the share price are rising.

The biggest threat is an indirect one springing from the airline industry. Rolls-Royce makes roughly 60% of profits from activities like selling aircraft engines and providing aftermarket services. The consequences of the war on carriers’ fuel costs and ticket sales could be considerable, reducing flight hours and demand for engine services.

The Iran War threatens to worsen the company’s ongoing supply chain problems too. This has the potential to send its own cost base soaring, impact day-to-day operations and derail key growth projects.

The verdict

It’s important to note that analysts are largely optimistic on the engineer. There are 15 currently rating the FTSE 100 stock. Their average 12-month share price target is £14.42, up 21% from today’s levels.

So investors should pile in and buy Rolls-Royce shares, right? Let’s pull back a second, and consider how expensive the company is. At £11.88, Rolls’ share price carries a price-to-earnings (P/E) ratio of 31.4 times. That’s more than double the long-term average of 15.

At these levels, I think the good news around the firm and its share price prospects are baked in, limiting scope for a fresh move higher. That’s not all — it could potentially lead to a correction if the sparkling trading updates investors have been used to begin to dry up.

Given the threats we’ve described here, this is a real possibility in my book. I’d be shocked to see Rolls shares drop all the way back to 900p. But in the current climate I think a slump could be on the cards, meaning I’m looking to buy other shares instead.

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But one person’s cast-off can be someone else’s find. On this basis, could this be a chance to buy into a FTSE 100 legend at a knockdown price? Let’s see.

Some numbers

Just before publishing its results, analysts were expecting Rolls-Royce to report an underlying operating profit of £3.27bn and free cash flow (FCF) of £3.19bn. Earnings per share (EPS) were forecast to be 29p. For 2028, they were predicting this to rise to 43.6p.

In terms of valuation, this meant the group was trading on 45.2 times forecast (2025) earnings, dropping to 30 when looking ahead to 2028. However, the group did better than expected. It reported EPS of 29.5p, 1.9% higher. And more importantly, it announced an upgrade in its forecasts.

For 2028, it said it was now targeting an underlying operating profit of £4.9bn-£5.2bn and FCF of £5.0bn-£5.3bn. Based on the mid-point of its earnings forecast, this would translate into EPS of around 45.2p. If realised, it means the forward (2028) price-to-earnings ratio would be 26.3.

That’s cheap for a rapidly-growing company. Could this be a brilliant entry point for new investors?

Trouble overhead?

Events of six years ago are a reminder of how vulnerable the group is to a downturn in the aviation industry. When the pandemic closed our skies, much of Rolls-Royce’s revenue dried up. And I don’t think it’s an exaggeration to say that it nearly went bust.

The current conflict in the Middle East has led to thousands of flights being cancelled. Inevitably, this will have led to some loss of revenue for Rolls-Royce although — at this stage — I suspect it’s not enough to materially change the group’s forecasts.

However, potentially of more significance, there could be a reduction in the future demand for air travel if, as a result of higher jet fuel costs, ticket prices rise and disposable incomes are squeezed due to an increase in general inflation.

Also, with an abundance of land and cheap energy, the Gulf’s become a hotbed for data centres. Rolls-Royce’s power systems division has been growing on the back of these electricity-thirsty facilities. But if economies in the region suffer long-term damage as a consequence of the war, investment in the sector may slow.

My view

However, I try to take a five-year (at least) view. And in doing so, the investment case looks compelling. I see huge potential from its small modular reactor programme. In addition, its defence business is likely to benefit from ongoing geopolitical uncertainty. The group’s also planning a return to the lucrative narrowbody aircraft engine market.

Okay, describing Rolls-Royce’s shares as an unmissable bargain may be a bit of an exaggeration. After all, there are plenty of other cheap stocks I have my eye on at the moment. But the recent pullback in the group’s share price — and the upgrade in its earnings forecasts — means its current valuation is much more attractive than it has been for quite a while.

I think it’s a stock that long-term investors could consider.

The post Now below £12, are Rolls-Royce shares an unmissable bargain? appeared first on The Motley Fool UK.

As I write ahead of Tuesday’s (7 April) market open, the company’s shares are sitting at 1,191.5p — down sharply from the recent highs that had made it a FTSE 100 darling.

So, what on earth’s going on?

Primed for growth?

On the surface, the investment case looks stronger than ever.

Geopolitical tensions are rising. NATO members are scrambling to hit the 2% of GDP defence spending target, with several committing to go further.

The UK government has pledged to lift defence expenditure to 2.5% of GDP by 2027. Defence contractors have rarely had a more favourable political environment.

Given the company’s strong market position as a manufacturer of engines for military jets, nuclear submarines, and power systems for naval vessels, it seems to be in a great position.

Surely the company should be riding this wave? And yet the price-to-earnings (P/E) ratio has contracted, not expanded, in recent weeks.

The civil aerospace complication

Here’s the part of the story that gets overlooked. The majority of the company’s revenue doesn’t come from defence at all.

Civil aerospace is the biggest money-maker, underpinned by long-term service agreements tied to its wide-body aircraft engines.

Under this model, the company earns fees based on the number of hours those engines fly. More flight hours mean more revenue. Fewer hours mean less.

That’s created a problem in recent weeks as conflict in the Middle East has hit the aviation industry hard.

Travel hours have been significantly reduced as airspace remains restricted. Airlines operating routes between the US, Europe, and Asia are already reassessing capacity. 

Iran’s control over the Strait of Hormuz has sent crude oil prices soaring and created uncertainty over global aviation supplies.

All of this has clearly worried investors. The Rolls-Royce share price has fallen 12.6% in the past month as investors try to price in the uncertainty and potential impact on the company’s future prospects.

My verdict

The Rolls-Royce share price has been under pressure of late. However, it’s worth zooming out from the current uncertainty to see the bigger picture. 

The company’s shares are still up nearly 1,000% in the past five years and it’s a Footsie top performer with a market cap over £100bn. The company remains on a compelling turnaround journey with a strong order book and a credible management team.

Sure, the outlook is less clear than it was a month ago. However, I think the recent turbulence and broader market uncertainty is understandable.

For patient investors with a long-term horizon, the recent pullback could be a chance to consider snapping up some shares for a cheaper entry point and it could be worth a closer look.

The post What on earth’s going on with the Rolls-Royce share price? appeared first on The Motley Fool UK.

What about 2026 so far?

The share price has essentially gone nowhere. It started well and indeed hit a new all-time high. However, it has since given up those gains and stands around 1% lower than where it began the year.

So, what is going on? Could this be a buying opportunity for my portfolio, or a warning signal that the long bull run in Rolls-Royce shares may have run out of steam?

The main problem is civil aviation

Shares never fall or rise for just one reason. There are always multiple factors that help to drive a share price, sometimes rationally so, but at other times without obvious rhyme or reason.

Having said that, sometimes the price action in a given share over a certain period can largely be pinned on a key driver.

I think that is the case with Rolls-Royce shares right now. The driver as I see it can be summed up as declining civil aviation economics.

By that I mean that the current war in the Middle East, with direct risks for tourists and other travellers, is likely to suppress civil aviation demand, eating into airline revenues. Meanwhile, surging jet fuel costs are piling on costs for the airlines.

Lower revenues combined with higher costs means a likely freeze on non-essential expenditure. That probably means airlines pushing back or cancelling orders for new aircraft. Fewer flying hours could lead to less of the costly deep services jet engines are required to go through after a set number of hours in use.

As civil aviation is the largest of Rolls-Royce’s three main business areas, that could be bad news for profits at the firm – hence why the shares are down.

Things are bad, but they’re not terrible

Still, Rolls has not yet indicated any specific concerns about a potential hit to profits.

Maybe it never will, because for example it can squeeze efficiencies out of the business to help keep earnings steady. It has proven effective at cost management in recent years.

Also, it is not yet clear that airlines are seeing passenger demand fall substantially on a global basis, rather than a more regional one. Nor is it clear how long any demand fall will last.

Still, with a weakening global economy and ongoing travel fears for many flyers, I think there are hard times ahead for civil aviation and those will last at least for months, not weeks.

Civil aviation is only one of Rolls’ businesses. Its defence division could well see customer demand keep growing, as it has in recent years. Similarly, high oil prices could be good not bad when it comes to demand for the company’s power systems business.

But as we saw during the pandemic, when Rolls’ civil aviation business does poorly, it affects the whole company’s performance significantly.

Even after this year’s lacklustre performance to date, Rolls-Royce shares are selling for 41 times earnings. That looks expensive to me and I will not be touching them.

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These numbers are testament to a business that has been genuinely transformed under CEO Tufan Erginbilgiç. The long-term story — growing demand with civil aviation, the defence spending boom, and an expanding power systems division — remains highly attractive.

The issue however, is the price. At 30 times forward earnings and a price-to-earnings-to-growth (PEG) ratio over two, it’s by no means cheap. The risk is simple. If execution stumbles at all, that multiple compresses fast.

For new investors, the risk/reward may look a little stretched. The company still offers a huge amount, including in nuclear technologies, but the meaningful undervaluation isn’t there.

Something much cheaper

Melrose Industries (LSE:MRO) provides exposure to the same aerospace upcycle, but at a much lower valuation. Down 28% from its 52-week high, the stock trades at just 12.4 times forward earnings with a PEG ratio of 0.9, suggesting the market’s paying very little for what is forecast to be 16% forward earnings growth.

One key operational highlight here is that Melrose holds a sole-source position for 70% of its produced components. This means there’s no alternative supplier. That creates genuine pricing power and sticky, recurring revenue as the global fleet expands and ages.

The risk worth watching is the balance sheet, with net debt sitting a little ahead of where you’d want to see it. Currency fluctuations are also something to keep an eye on.

Hidden in plain sight

I think many Britons don’t realise that they can invest in Airbus. It’s a household brand and perhaps the most straightforward quality case of the three.

As one half of a global commercial aviation duopoly, Airbus has pricing power on a generational scale. Its order backlog stretches years into the future and revenue is forecasted to grow from €73bn in 2025 to over €100bn by 2028.

The earnings forecast — largely curated before the outbreak of war — is on a clear upward trajectory from €6.60 to €10.77 over the same period. On 2027 numbers, the stock trades on just 18 times earnings.

That’s a huge discount to Rolls. It also offers a 2.1% dividend yield and a has a rock-solid balance sheet with €12.2bn in net cash.

The main risk is operational. Airbus has struggled to ramp production rates to meet demand, and the supply chain has been problematic. Tariff exposure on transatlantic trade is also worth monitoring.

However, the valuation cushion is substantial, as is the moat.

All three companies are worth considering for long-term investors. But Rolls-Royce, for all its quality, asks investors to pay a premium price for a premium business. Melrose and Airbus, by contrast, offer a lot of the same at a considerably more attractive entry point.

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The engineer’s outperforming the broader FTSE 100, which is up 1.9% in mid-week trading. It’s perhaps no surprise — Rolls-Royce could be one of the biggest beneficiaries of a ceasefire, along with the airlines it supplies.

The shares have fallen 11.8% in the month to date. Could they be about to take flight again following today’s news? Despite what I said above, I’m not so sure…

Good news?

We’ve been here before, right? I mean, markets have rallied on political soundbytes suggesting the conflict could be a short one. Then shortly afterwards hopes faded, causing share prices to backtrack again. It was just three weeks ago that President Trump said that the war was “very complete” only for it to escalate.

In fresh comments overnight, the commander-in-chief told the press that the US “will be leaving [Iran] very soon,” and that military involvement could end in “two or three weeks.”

It’s quite possible, of course. And especially considering the political implications of what’s proved an unpopular war in the US and globally. But with uncertainty over what President Trump’s military goals are, and with US troops still building up in the Middle East, could today’s market rally be premature?

What’s the danger for Rolls?

So let’s look at the implications of this for Rolls-Royce shares. One problem I have is that the engineer’s shares still look expensive on paper. At £11.91 each, it has a forward price-to-earnings (P/E) ratio of 30.3 times. It’s still more than double the 10-year average.

With a premium like that, I fear the company could again fall more sharply than the broader market if optimism over ending the Iran War fades. Rolls’ near-12% share price drop over the last month is far worse than the FTSE 100’s 4% decline, and reflects the vulnerability of expensive shares when investor sentiment worsens.

A prolonged conflict creates a number of problems for the engineer. Rising oil prices are impacting airline profitability, which later down the line might dampen demand for new planes and power units. Yesterday Korean Air said it was introducing emergency cost-cutting measures to deal with the crisis.

It’s also likely soaring energy costs will impact the firm by fuelling broader inflation, hitting consumer spending. The result? Fewer flights that reduce large engine flying hours, and therefore the income Rolls makes from servicing power units.

Bottom line

The thing is, it’s possible the Iran War’s already caused damage that’s not yet reflected in the share price. So even if the conflict ends soon, any signs of weakness in the firm’s upcoming trading releases could still cause its shares to slump.

On the other hand, revenues from defence customers could pick up as the geopolitical landscape unfortunately ruptures. And over the long term, the outlook for the civil aerospace sector remains robust. But right now, I think Rolls shares are far too risky for me.

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This extraordinary transformation was powered by one of the most aggressive corporate resets the FTSE 100 has seen in years. And after the 12‑fold rerating, the shares have finally paused for breath.

But the business is now delivering higher margins, stronger cash flow and clearer long-term targets. So is now the right time for me to buy more of the stock on this rare share price dip?

Outstanding recent results

Rolls‑Royce delivered another stunning year in 2025, with underlying operating profit rising 41% year on year to £3.5bn. This underlined the impact of its transformation programme, focused on efficiency, simplification, and sharper commercial discipline.

Free cash flow surged 38% to £3.3bn, highlighting the enduring strength of its long‑term service agreements. These involve airlines paying Rolls‑Royce for engine servicing over many years, and it means steady, recurring cash flows for the firm every time its engines are flying.

Meanwhile, net cash soared 299% to £1.9bn, illustrating how far the balance sheet has been strengthened as profitability and cash generation accelerate.

Even stronger momentum ahead?

One risk to Rolls-Royce is any major failure in one of its key products which could be costly to fix. Another is the high degree of competition in its core business areas, which may squeeze its margins over time.

Even so, the firm’s management expects underlying operating profit to rise again in 2026 to £4bn-£4.2bn, with free cash flow of £3.6bn-£3.8bn. And it has upgraded its medium‑term targets to an underlying profit of £4.9bn-£5.2bn, free cash flow of £5bn-£5.3bn and return on capital of 23%-26%.

Crucially, several major long‑term growth drivers are now coming into view. Rolls‑Royce is expanding its global maintenance network, including new capacity in Beijing. This China addition alone will support up to 250 Trent engine overhauls a year by the mid‑2030s.

It also secured a commitment from ČEZ Group for up to six small modular reactors (SMRs). Industry forecasts are that the SMR market will reach $295bn (£222bn) by 2043 — a 30% compound annual growth rate.

And defence growth has been reinforced by contracts worth £1.5bn with the UK Ministry of Defence and US Department of War. These will run alongside programmes for the MV-75 future long-range assault aircraft and the B-52 heavy bomber.

My investment view

Despite Rolls-Royce’s recent share price gains, it still looks undervalued to its peers. On the key price-to-earnings measure, it trades at 16.1 — bottom of its peer group, which averages 32.5. These firms comprise Northrop Grumman at 23.2, BAE Systems at 31.9, TransDigm at 36.2 and RTX at 38.6.

Given its new performance guidance, analysts forecast that Rolls-Royce’s return on equity will be a stunning 109% by end-2028. This highlights a business capable of generating exceptional returns on its capital. It is the kind of return normally associated with elite companies — which investment-grade Rolls-Royce now is — priced at very high levels, not one trading at the lowest valuation in its sector.

Alongside this, the company announced a further £7bn-£9bn in share buybacks for 2026-2028. These tend to support share price gains.  

Together, these factors look compelling to me, and I will buy more of the stock very soon.

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When to sell

When is the right time to sell and move on? At the Fundsmith Annual Meeting, Terry Smith raised this question about funds. His answer is… when things have been going well. Given Fundsmith’s recent results, that’s probably no surprise. 

The underlying rationale is that investing styles go in and out of fashion. That’s true whether it’s growth, value, or anything else. In the case of funds, I’m not convinced. But I do think this makes a lot more sense in the case of shares in individual companies. 

Lloyds Banking Group isn’t going to start making missile systems because of rising defence spending. And nobody thinks it should.

Things are different with funds. Portfolio managers have the opportunity to see opportunities and shift their portfolios accordingly.

Sell high

Selling high to buy low makes a lot of sense as a strategy. But it’s much easier said than done on both sides of the equation. A year ago, Rolls-Royce shares were very clearly at highs. The stock had posted an 805% return across the previous five years.

Anyone who sold at that point though, missed out on another 47% in the last 12 months. And that’s only part of it. Twelve months ago, Diageo shares were trading at their lowest prices in a decade. That presumably counts as buying low, if anything does. 

Unfortunately, that stock’s down another 30% in the last year. So the cost of selling Rolls-Royce to buy Diageo a year ago has been huge.

Selling high and buying low is a good idea. But it’s no easier to work out when a stock’s going to fall than it is to predict a recovery. 

Valuation

The decline in the Rolls-Royce share price has happened in the last month. Unsurprisingly, it’s coincided with the conflict in Iran. Higher oil prices threaten increased flying costs and this weighs on demand. And that’s bad for the firm’s commercial aerospace division. This has been the biggest driving force behind the company’s recent success. So investors need to pay attention to what’s going on. 

The stock’s still trading at some unusually high valuation multiples. On a price-to-book (P/B) basis, it’s close to a 10-year high. In terms of the price-to-earnings (P/E) ratio, things look more reasonable. But a lot of that is due to a one-off tax consideration.

High multiples make the stock more vulnerable to exogenous shocks. That’s what’s happened and it’s still the case.

Hold?

A lot of the time in the stock market, the best thing to do is nothing. And I think that’s the case with Rolls-Royce shares right now. The current valuation multiples make it hard to buy the stock right now. But selling comes with the risk of missing future returns. 

Geopolitical uncertainty makes it almost impossible to know what to do. And that probably makes it best to do consider doing nothing at all.

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