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ROLLS ROYCE (LON:RR)
UK Aerospace & Defence
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Stock Of The Month
JAN 2026 - ISSUE #004
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Executive Summary:
- The Story: CEO Tufan Erginbilgiç's
turnaround has delivered—operating profit up 57% to £2.5B in 2024, with engine
flying hours back to 103% of pre-COVID levels
- Valuation: P/E of 29.7x reflects high
expectations; trades at slight discount to Safran and GE Aerospace
- Catalysts: H1 2025 profit up 50% YoY;
£1B buyback announced; 2027 targets likely met 2 years early
- Key Risk: 46.5% volatility means ±£600
swings on a £5k position in a typical month—position size matters
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Reward Score
79
/100
High Reward
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Risk Score
59
/100
Medium-High Risk
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How We Score: Reward combines Growth (35%), Momentum (25%),
Profitability (20%), Valuation (15%), and Size (5%). Risk uses Solvency (35%),
Volatility (25%), and inverted versions of Growth, Margins, and Size.
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5 YEAR SHARE PRICE HISTORY
From around 100p in 2021 to 1300p today. That's a 13x return driven by the Erginbilgiç
turnaround.
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1 Month
+8.2%
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3 Month
+11.3%
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6 Month
+30.3%
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1 Year
+93.8%
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5 Year
+1,200%
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Reward Analysis
Our reward score analyses RR's potential upside using 5 weighted factors.
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GROWTH (35% weight)
100/100 (Top
decile)
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📈
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🔍 What's Driving This: RR's 131.9% net income CAGR reflects CEO Tufan
Erginbilgiç's aggressive turnaround since joining in late 2022. He famously called RR a "burning
platform" and launched a 4-pillar restructuring. Key drivers: (1) Engine flying hours recovered
to 103% of 2019 levels in 2024, boosting high-margin aftermarket revenue; (2)
Civil Aerospace margins jumped from 11.6% to 16.6%; (3) £350M+ in restructuring savings with
£500M+ expected by end of 2025.
Caution: The CAGR is inflated by a low 2021-22 base when RR posted multi-billion pound
losses. Growth is now normalising. H1 2025 revenue was up 11% YoY, still strong but decelerating
from
turnaround peaks.
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Revenue CAGR (3yr)
19.0%
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Net Income CAGR (3yr)
131.9%
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2024 Op. Profit
£2.5B (+57%)
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100/100
Top-decile momentum. The +93.8% 12m return followed the successful
pivot from "survival mode" to growth. H1 2025 profits beat consensus by 50%.
Note: 3m return (+11.3%) is slowing. Watch for mean reversion.
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VALUATION (15%)
40/100
Fairly valued vs peers. P/E of 29.7x is below Safran (32x) and GE
Aerospace (35x). Either market expects margin compression, or there's remaining
upside.
P/E: 29.7x | EV/Sales: 3.9x | PEG: 2.80
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RR vs Aerospace Peers
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RR |
Safran |
GE Aero |
| P/E |
18-19x |
30-31x |
43.6x |
| Margin |
13% |
11% |
18% |
| 12m Return |
+94% |
+49% |
+90% |
RR trades at a discount to peers despite outperforming.
PROFITABILITY (20%)
55/100
Solid but watch margins. Group margin reached 13.8% in 2024 (vs
10.3% in 2023). Civil Aerospace hit 16.6%. Margins contracted 1.3% QoQ
recently—monitor supply chain pressures.
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SIZE FACTOR (5%)
40/100
Large Cap (£74.5B). Stable and liquid, but less explosive upside
than mid-caps. FTSE 100 constituent.
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Risk Analysis
Our risk score assesses RR's downside potential using 5 weighted factors.
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VOLATILITY (25% weight)
70/100 (Elevated)
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📉
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🔍 What This Means Practically: At 46.5% annualized volatility, a
£10,000 position could swing ±£2,300 in a typical month. The -27% max
drawdown means you should only invest amounts you can watch fall by a quarter without
panic-selling.
Position sizing guidance: Consider limiting RR to 2-3% of your portfolio maximum.
High volatility isn't necessarily bad. It can be an opportunity. But it tests your
conviction during
drawdowns.
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Annualized Vol
46.5%
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Max Drawdown
-27.0%
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1-Year Return
+124.3%
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FINANCIAL SOLVENCY (35%)
50/100
Balance sheet turnaround. RR went from £5.2B net debt in 2020 to
net cash positive in 2024. Gross debt down from £6.1B to £4.2B.
Credit rating now BB+ (S&P), targeting investment grade by 2026.
£7.9B liquidity buffer.
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OPERATIONAL QUALITY (30%)
20/100
Very robust. FCF margin of 15.3%, Cash ROA of 10.6%. H1 2025 FCF
guidance raised to £3.0-3.1B. £1B buyback signals confidence.
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SIZE RISK (10%)
20/100
Low existential risk. Large-cap (£74.5B) provides stability. Diversified across
Civil Aerospace, Defence, and Power Systems.
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Scenario Analysis
What could RR be worth in 3 years? Based on current price of £13 / 1300p.
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🟢 Bull Case
EPS grows 18%/yr as flying hours hit 130% of 2019. P/E holds at 28x.
Target: £22 (+69%)
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⚪ Base Case
EPS grows 12%/yr, P/E compresses to 22x as growth normalises.
Target: £16 (+23%)
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🔴 Bear Case
Margins fall 3% on supply chain issues. P/E contracts to 18x.
Target: £8.50 (-35%)
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These are illustrative scenarios, not forecasts. Actual outcomes depend on factors including
aviation demand, defence spending, and macroeconomic conditions.
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⚠️ What Would Change Our View
- Net margin falls below 10% for 2 consecutive quarters
- Engine flying hours growth stalls below 5% YoY
- Defence order book declines as NATO spending normalises post-Ukraine
- CEO Erginbilgiç departs or strategic reversal announced
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What the Bears Say
Contrarian views and analyst concerns worth considering.
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Citi • Downgrade to Neutral • January 2025
"The stock is approaching fair value following its robust recovery. While we raised our
price target to 641p, much of the turnaround is now reflected in the share price."
DCF Analysis • December 2025
"A discounted cash flow analysis suggests RR may be approximately 17.6% overvalued at
current levels. The forward P/E of 40x+ is more typical of high-growth tech stocks than
industrial companies."
The Motley Fool • December 2025
"Civil aviation demand may be peaking. RR shares collapsed during the pandemic when flying
hours cratered. This cyclical vulnerability hasn't disappeared. Investors waiting for dips
in
2026 may be rewarded."
Technical Analysis • January 2026
"Bearish divergence patterns and overbought RSI readings suggest increased risk of a
near-term correction. With consensus price targets near current levels, upside may be
limited."
🔍 Our Take on the Bear Case
The valuation concerns are legitimate—at 30x earnings, RR needs to keep executing. However,
the Citi downgrade came at 641p (now £13+), and guidance continues to beat expectations. The
bears are right that easy gains are behind us; the question is whether operational momentum
can sustain the multiple. Position sizing and stop-losses matter more here than with cheaper
stocks.
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The Investment Case
A balanced view of the bullish and bearish factors.
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🟢 Bull Case
- Proven turnaround: Erginbilgiç
delivered. Operating profit was up 57% in 2024, and 2027 targets are likely to
be met 2 years early
- Structural tailwinds: Engine flying
hours projected to hit 130-140% of 2019 by 2028; Defence order book at record
£9.2B
- Capital returns: £1B buyback + 30%
payout ratio reinstated after years of zero returns
- Valuation gap: Discount to Safran/GE
despite outperformance
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🔴 Bear Case
- Turnaround priced in: Up 94% in 12
months means good news is already reflected. Limited room for positive surprises
- Supply chain risks: Trent engine
"time-on-wing" issues persist; margin pressure from parts/labour costs
- Volatility risk: 46.5% annualized vol
with -27% drawdown tests investor conviction
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The Bottom Line
RR is a genuine turnaround story, not just hope. Erginbilgiç has delivered real results:
operating profit up 57%, flying hours recovered, and capital returns reinstated. The question is
whether it's priced in at £13 / 29.7x P/E.
Our view: At a discount to peers and with H1 2025 beating expectations by 50%,
there may be room to run. But the 46.5% volatility means you need to size your position
carefully. This is
not a "bet the farm" stock.
Key catalysts to watch: FY25 results (Feb 2026), engine flying hour growth
rate, Defence order book updates, and any margin guidance changes.
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Coming Next Month
February 2026 Stock of the Month
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Stay tuned...
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