Image source: Rolls-Royce plc
Rolls-Royce (LSE: RR) shares are near an all-time high following the 26 February release of its 2025 results. However, I believe there could still be enormous value left in the stock.
That is because price and value are not the same thing. Price is just whatever the market is willing to pay at any given point. But value reflects the true worth of the underlying business.
Legendary investor Warren Buffett summed it up, saying: “Price is what you pay; value is what you get.” He added that investors should focus on buying companies with a value that is greater than their price.
How good were the results?
Rolls-Royce’s 2025 underlying operating profit soared 41% year on year to £3.46bn. This lifted the margin 3.5 percentage points to 17.3% as strategic initiatives and commercial optimisation continued to take hold.
Revenue jumped 13% to £20.1bn, supported by stronger large‑engine aftermarket activity, improved contractual terms and higher Civil Aerospace spare‑engine profitability.
Free cash flow leapt 25% to £3.3bn, driven by robust operating profit, continued Long‑Term Service Agreement (LTSA) balance growth and a strong working‑capital inflow. This helped the group move to £1.9bn of net cash from £475m a year earlier.
Defence and Power Systems also contributed, with margins of 14.4% and 17.4% respectively, reflecting improved performance across transport, combat and datacentre power generation.
Management issued confident 2026 guidance — £4bn-£4.2bn of operating profit and £3.6bn-£3.8bn of free cash flow — and upgraded its 2028 mid-term targets, alongside announcing a £7bn-£9bn multi-year share buyback.
Key growth drivers from here
Rolls-Royce’s forward momentum is supported by a pipeline of contracted work, capacity expansion and technology upgrades extending well beyond the 2026 guidance. A risk to growth is any major problem in any of its key products. This could be expensive to rectify and might damage its reputation.
Even so, in Civil Aerospace, large‑engine flying hours are expected to rise to 115%-120% of 2019 levels in 2026. This is supported by 550-600 new engine deliveries. The LTSA balance is forecast to keep growing strongly, underpinned by improved engine flying hours.
This is supported by a durability programme targeting 100%+ time‑on‑wing increases across Trent engines by 2027. New developments such as the Trent XWB‑84EP and upgraded High‑Pressure Turbine blades for the Trent 1000 and 7000 are also forecast to lift long-term margins.
Defence growth is reinforced by contracts worth £1.5bn with the UK MoD and US DoW. These will run alongside programmes for the MV-75 future long-range assault aircraft and the B-52 heavy bomber.
Management forecasts strong growth from surging data centre demand for its Power Systems products. Next-generation Series 4000 engines are due in 2028, along with expanded capacity in Germany and the US. The firm’s small modular reactor (SMR) also creates future value, with confirmed UK deployment at Wylfa and international tenders progressing.
My investment view
These multiple growth drivers do not appear to be reflected in Rolls-Royce’s share price yet.
Its price-to-earnings ratio of 19.1 is bottom of its peer group, which averages 34 — so it is very undervalued on this measure. These firms comprise Northrup Grumman at 24.6, BAE Systems at 30.5, RTX at 40.4, and TransDigm at 40.7.
Given the combination of growth catalysts and undervaluation, I will buy more of the shares as soon as possible.
