Rolls-Royce Holdings
Razor-and-blades: sell/place large turbofan engines near cost, monetize 25+ year LTSA (long-term service agreement) aftermarket per engine flying hour; plus defence contracts (submarines, combat, transport), mtu-brand power systems (data centres a key growth vector), and an emerging SMR franchise (equity-accounted since its 2025 deconsolidation)
Earnings, margins, COGS & capex
FY2025 (reported 2026-02-26, underlying basis): revenue GBP 20.06B (+14% organic), operating profit GBP 3.46B (+40%, 17.3% margin), FCF GBP 3.27B (FY2024: GBP 2.43B), basic underlying EPS 29.55p (statutory EPS 69.41p, inflated by one-off credits including the SMR deconsolidation gain and a deferred-tax credit), ROC 18.9%, net cash GBP 1.9B. All divisions grew: Civil Aerospace GBP 10.4B (+15%), Power Systems GBP 4.9B (+19%, data-centre revenue +35%), Defence GBP 4.8B (+8%). Total dividend 9.5p (32% payout of underlying PAT, final paid 2026-06-03); GBP 1.0B buyback completed in 2025 and a GBP 7-9B multi-year buyback announced for 2026-2028 (GBP 2.5B in 2026). 2026 guidance: operating profit GBP 4.0-4.2B, FCF GBP 3.6-3.8B — hitting the prior mid-term range two years early. Upgraded 2028 targets: operating profit GBP 4.9-5.2B, 18-20% margin, FCF GBP 5.0-5.3B, ROC 23-26%.
Revenue trend
Margins
up from 13.8% FY2024; 18-20% targeted by 2028
up from 16.6% — aftermarket strength, contractual margin and commercial optimisation
up from 13.1% (op profit +60% to GBP 852M) — data-centre power generation driving mix; 18-20% targeted mid-term
stable (14.2% FY2024); 14-16% mid-term target
rising; 2028 targets imply ~20%+
COGS structure
Engine OE is sold at or near a loss (classic razor; company targets Trent XWB installed deliveries reaching breakeven or better mid-term); profit sits in the multi-decade aftermarket. Cost base is dominated by nickel superalloys, titanium, precision castings/forgings, and skilled-labor MRO. Supply-chain costs remain the key pressure — 2026 FCF guidance absorbs a GBP 150-200M supply-chain cash impact; LTSA repricing and commercial optimisation under the 2023-25 transformation drove most of the margin expansion.
Capex
Stepped up in FY2025: MRO shop-visit capacity added in Derby, Dahlewitz, and Singapore (supporting a >50% increase in large-engine shop visits over the past three years, with a further ~20% network capacity increase planned by mid-term), the BAESL JV with Air China opened Dec 2025, an Istanbul maintenance centre with Turkish Technic targeted for end-2027, Power Systems capacity expansion in Germany and US (Aiken, Mankato), plus UltraFan development.
Latest earnings
Strong print: FY2025 operating profit GBP 3.46B and FCF GBP 3.27B, with 2026 guidance reaching the prior mid-term targets two years early; mid-term targets upgraded and a GBP 7-9B buyback announced alongside
FY2026: underlying operating profit GBP 4.0-4.2B, FCF GBP 3.6-3.8B. Mid-term (2028): op profit GBP 4.9-5.2B, margin 18-20%, FCF GBP 5.0-5.3B, ROC 23-26%
- Underlying operating profit
- GBP 3.46B (FY2025), +40% YoY (FY2024: GBP 2.46B)
- Free cash flow
- GBP 3.27B (FY2025) vs GBP 2.43B (FY2024)
- Net cash
- GBP 1.9B (31 Dec 2025)
- Basic underlying EPS
- 29.55p (FY2025) vs 20.29p (FY2024); statutory EPS 69.41p incl. one-off credits
- Dividend / buyback
- 9.5p total dividend (32% payout); GBP 2.5B buyback in 2026 within GBP 7-9B 2026-28 program
- Return on capital
- 18.9% (FY2025) vs 13.8% (FY2024); 23-26% targeted by 2028
Growth drivers
- Large-engine flying hours (Trent aftermarket) — +8% in 2025 to 111% of 2019 levels; 2026 guided at 115-120% of 2019; 130-140% by 2028
- Widebody OE cycle — 550-600 total OE deliveries guided for 2026 (2025: 483 including 259 large engines; Trent XWB-84/-97 on A350, Trent 7000 on A330neo, Trent 1000 on 787); 638 large engines ordered in 2025
- Shop visits 1,480-1,550 guided for 2026 (2025: 1,440, +10%) — expanded MRO capacity is directly monetizable
- Power Systems data-centre demand — data-centre revenue +35% and power-generation revenue +30% in 2025; power-gen order intake +31%; next-gen Series 4000 targeting data centres from 2028
- SMR franchise — UK GBE-N selection Jun 2025, Wylfa site confirmed Nov 2025 (3 units, site capable of eight), contract signed Apr 2026 (FID expected 2029); Sweden's Videberg Kraft selected RR SMR Jun 2026 (3 x 470 MW, ~1,500 MWe); Czech Temelin site work begun; company expects RR SMR profitable and FCF-positive by 2030
- Defence upcycle — >300 Leopard 2 engine order (Dec 2025), >GBP 1.5B UK MoD / US DoW aftermarket contracts, AUKUS submarines, B-52 (F130) and MV-75 (AE 1107) ramps, GCAP and MQ-25
- Potential narrowbody engine market re-entry (UltraFan-derived) — stated optionality, not committed revenue
Bull & bear
A contracted, repriced aftermarket annuity compounding at double digits, a defence business with sovereign moats in a rearmament cycle, an AI-power kicker in Power Systems, and an SMR option that keeps winning national competitions — run by a management team that has beaten and raised every year since 2023.
- 2028 targets (GBP 4.9-5.2B op profit, GBP 5.0-5.3B FCF) were set in Feb 2026 AFTER guiding to hit the prior mid-term range two years early — the pattern is under-promise, over-deliver
- Engine flying hours at 111% of 2019 and guided to 115-120% in 2026 (130-140% by 2028); the installed Trent base keeps growing and LTSA receipts hit GBP 6.0B in 2025 — contracted, repriced, and capacity-expanded
- GBP 7-9B buyback 2026-28 (roughly 6-8% of the ~GBP 118B market cap) plus a reinstated dividend on a net-cash balance sheet — capital returns are now structural
- Power Systems is quietly becoming an AI-infrastructure play: data-centre revenue +35%, power-gen revenue +30%, op profit +60% to GBP 852M at a 17.4% margin, with an 18-20% mid-term target
- SMR is a call option with mounting validation: UK contract signed Apr 2026 (3 units at Wylfa, site capable of eight, GBP 2.6B allocated in the UK Spending Review), Sweden won against GE Vernova Hitachi (3 x 470 MW), Czech site work begun — and management expects RR SMR profitable and FCF-positive by 2030
- Defence (GBP 4.8B revenue, +8%) is sole-source on UK submarine reactors for AUKUS — effectively un-competable revenue for decades
A cyclical widebody aftermarket story priced as a compounding staple: ~50x underlying trailing earnings for a company structurally absent from narrowbody, exposed to long-haul air travel shocks, with an SMR narrative whose UK final investment decision is not until 2029, and a margin transformation that is now largely in the price.
- Valuation: at ~1,480p (~GBP 118B / ~$154B) the stock trades ~50x FY2025 underlying basic EPS (29.55p) and ~23x the midpoint of its own 2028 FCF target — the headline ~20x trailing statutory P/E flatters, since statutory EPS (69.41p) includes one-off credits such as the SMR deconsolidation gain and a GBP 277M deferred-tax credit
- The margin jump (13.8% -> 17.3% in one year) leaned heavily on LTSA repricing and commercial optimisation — repeatable margin levers are thinning as the transformation completes
- Widebody concentration: a pandemic-style long-haul shock, a disruption to Asian long-haul traffic, or a Trent durability AD would hit flying-hour receipts immediately
- No narrowbody position while CFM (GE/Safran) and Pratt (RTX) split the largest engine market; UltraFan re-entry would cost billions with first revenue in the mid-2030s at best
- SMR economics unproven: no SMR vendor anywhere has delivered a unit on time/on budget; UK FID is 2029 and first power mid-2030s; Sweden/Czech commitments stack up before the factory model is validated — the 2030 profitability claim is management's, not demonstrated
- Supply chain remains the binding constraint: 2025 OE deliveries fell to 483 from 529 on industry-wide shortages, and 2026 guidance embeds a GBP 150-200M supply-chain cash hit — a castings/forgings shortfall pushes both OE and shop-visit revenue right
- FX and multiple risk: GBP strength deflates USD-reported ADR returns, and a meaningful part of the +52% 12-month run is re-rating rather than earnings growth
What it is worth
Trailing and forward multiples vs aerospace peers (GE, SAF.PA, MTX.DE, RTX) cross-checked against the company's own 2028 FCF targets (reverse-DCF discipline); SMR treated as option value
~950-1,100p (ADR ~$13-15)
a widebody demand shock, Trent durability AD, or supply-chain miss cuts flying-hour cash; multiple de-rates toward ~15x forward FCF — roughly the 52-week-low zone ($13.06)
~1,400-1,500p (ADR ~$18.50-20
near current): 2026 guide met (op profit GBP 4.0-4.2B, FCF GBP 3.6-3.8B), buyback executes, multiple drifts sideways as earnings grow into it
~1,600-1,700p (ADR ~$21-22)
2028 targets tracked toward a year early, SMR orderbook grows beyond UK/Sweden/Czech, narrowbody re-entry announced with a partner — multiple holds near ~25x forward FCF on higher numbers (JPMorgan 1,625p is the sell-side marker)
At ~$154B (~GBP 118B) market cap (2026-07-09, stockanalysis.com), the stock trades ~50x FY2025 underlying basic EPS (29.55p at ~1,480p) and ~23x the midpoint of its own 2028 FCF target (GBP 5.0-5.3B). The screen-quoted trailing P/E of ~20x uses statutory EPS (69.41p), which is inflated by one-off credits (SMR deconsolidation gain, GBP 277M deferred-tax credit) — the underlying multiple is the honest anchor. The price implies the 2028 targets are hit AND FCF keeps compounding beyond 2028 (aftermarket annuity plus a buyback retiring roughly 2-3% of shares per year). Defensible if flying hours, Power Systems data-centre growth, and defence all deliver — but it embeds near-flawless execution and assigns positive value to SMR, which is pre-FID in the UK until 2029. JPMorgan's 1,625p target (raised 2026, Overweight) marks the bullish sell-side anchor; the ADR consensus target is ~$21 (stockanalysis.com).
SWOT
Strengths
- Duopoly/triopoly position in widebody engines (sole source on A350 and A330neo; one of two on 787) with a 25+ year contracted aftermarket annuity
- Net cash balance sheet (GBP 1.9B) restored after the 2020 near-death experience; dividend reinstated after 5+ years and first buyback in 10 years completed
- Margin transformation delivered, not promised: group margin 13.8% -> 17.3% in one year, Civil at 20.5%
- Defence franchise with sole-source UK nuclear submarine propulsion (AUKUS) — decades-long, sovereign-protected revenue
- First-mover SMR position: only vendor with UK, Czech, and Swedish selections in hand as of mid-2026
Weaknesses
- No narrowbody presence — absent from the largest, fastest-growing engine segment (A320neo/737 MAX) since exiting the IAE consortium
- Trent 1000 durability legacy still consumes shop-visit capacity (step-up in Trent 1000 shop visits in H2 2025) and goodwill with 787 operators
- Aftermarket earnings are leveraged to widebody flying hours — concentrated exposure to long-haul cycles and geopolitical shocks
- SMR is pre-revenue at scale — company targets RR SMR profitability by 2030 but UK FID is not until 2029 and first power is mid-2030s — long and politically contingent
- GBP-reporting, UK-domiciled — valuation historically discounted vs US peers; OTC ADR liquidity thinner than NYSE-listed comps
Opportunities
- AI/data-centre power demand — Power Systems data-centre revenue +35% and power-gen order intake +31% in 2025; ~20%/yr power-gen OE growth targeted mid-term; BESS business now breakeven
- SMR orderbook expansion — Sweden's Videberg award (3 x 470 MW) validates export demand; Wylfa site scoped for up to 8 units; CEZ committed to up to six units in the Czech Republic; AMR/HTGR adjacency via the UKNNL-JAEA trilateral (Jun 2026)
- MRO capacity build-out converts a bottleneck into revenue — +20% further network capacity by mid-term, BAESL JV (up to 250 overhauls/yr by mid-2030s), Istanbul centre end-2027 (up to 200 shop visits/yr)
- European/NATO defence spending supercycle: Typhoon, >300 Leopard 2 engines, submarines, B-52/MV-75 ramps
- Narrowbody re-entry via UltraFan technology — a credible path back into the biggest profit pool in aerospace
Threats
- GE Aerospace and Safran/CFM dominate narrowbody and are pushing RISE open-fan for next-gen — risk RR stays locked out
- A durability or AD-grounding event on a Trent variant would hit both cash and the multiple
- Supply-chain fragility (castings, forgings, titanium) caps OE delivery ramp industry-wide — 2025 OE deliveries (483) fell short of 2024 (529) on airframer schedules; RR guides a GBP 150-200M supply-chain cash impact in 2026
- Nuclear SMR competition (GE Vernova Hitachi BWRX-300 — the losing finalist in Sweden — Westinghouse AP300, Holtec) plus political/permitting slippage
- Valuation embeds strong execution — ~50x FY2025 underlying EPS — any guidance miss or widebody demand wobble de-rates the stock sharply
Moats, dependencies & bottlenecks
Moats
25+ years per engine placed Sole-source on A350 (Trent XWB) and A330neo (Trent 7000); one of two on 787. Certification barriers make displacement essentially impossible mid-life
Only three companies (GE, RR, P&W) certify large commercial turbofans; billions of dollars and roughly a decade to develop one
multi-decade (AUKUS runs to the 2040s+) Sole supplier of PWR reactors for Royal Navy submarines; national-security protected
building depends on first-of-a-kind delivery Only SMR vendor with three national selections (UK, Czech, Sweden) as of mid-2026; factory-build model unproven
Power Systems data-centre and governmental niches with switching costs in mission-critical backup and bridging power
Dependencies
customer/platform high concentration A350 and A330neo are RR-exclusive engine platforms — RR's OE and future aftermarket ride Airbus widebody rates
customer/platform Trent 1000 on 787 competes with GE GEnx; Boeing widebody rate recovery matters
Aftermarket receipts are per engine flying hour — pandemics, wars, and Asia-Pacific traffic swings flow straight to cash
Precision Castparts/Berkshire BRK.B, ATI, Carpenter Technology CRS) Industry-wide bottleneck; 2025 OE deliveries fell YoY on airframer schedules and RR guides a GBP 150-200M supply-chain cash impact in 2026
anchor customer + funder (SMR) SMR pace is set by government contracting (Apr 2026 contract; GBP 2.6B Spending Review allocation) and the 2029 FID
Submarines and combat propulsion; >GBP 1.5B aftermarket contracts with the UK MoD and US DoW secured in 2025
GBP-reporting with USD-heavy aerospace revenue; superalloy inflation pressures LTSA economics
Advantages
- Contracted aftermarket revenue with repriced LTSAs — LTSA invoiced flying-hour receipts of GBP 6.0B in 2025 give high revenue visibility a decade out
- Net cash (GBP 1.9B) plus GBP 3.3B annual FCF funds buybacks, SMR, and UltraFan simultaneously — no financing dependency
- Three-division diversification: civil cycle, defence counter-cycle, power systems secular (AI/data-centre)
- Proven turnaround management (CEO Tufan Erginbilgic since Jan 2023) with a beat-and-raise track record
- Only Western engine maker with an operating naval nuclear-reactor business to bootstrap SMR credibility
Weaknesses
- Zero narrowbody share — the industry's biggest profit pool belongs to CFM and Pratt & Whitney
- Widebody/long-haul concentration in Civil Aerospace
- Premium valuation (~50x underlying trailing EPS) leaves little room for execution slips
- SMR is a long-dated capital commitment — FID 2029, first power mid-2030s, profitability target 2030 is management's own
- Trent 1000 reputational overhang with 787 operators
Bottlenecks
- MRO shop-visit capacity — >50% shop-visit growth already delivered over three years, but a further ~20% network expansion (plus BAESL and Istanbul end-2027) is needed to serve fleet growth
- Castings and forgings supply for turbine hardware — industry-wide constraint on both OE deliveries (550-600 guided for 2026) and spares
- Skilled-labor availability in aerospace MRO and UK nuclear engineering
- SMR regulatory and investment cadence — UK contract signed but FID is 2029; siting, licensing, and grid steps gate revenue into the 2030s
- Trent 1000 durability fixes still absorbing shop capacity (H2 2025 step-up in Trent 1000 visits)
Top signals & trends
Top signals
First full print against the raised FY2026 guide (op profit GBP 4.0-4.2B); flying hours and shop-visit pace are the tells
2025 delivered +8% to 111% of 2019; direct cash-flow driver
UK contract signed Apr 2026, Sweden selection Jun 2026, Czech site work underway; watch further European processes and the UK 2029 FID path
Within the GBP 7-9B 2026-28 program; steady repurchases support the ADR
Strategic fork: multi-billion investment vs staying a widebody pure-play; an announcement would reset the long-term model either way
The binding constraint on the 550-600 OE delivery guide; RR embeds a GBP 150-200M supply-chain cash impact in 2026 FCF guidance
Any new AD on a Trent variant is the classic downside shock for this name
Trends
Aging widebody fleets plus Asia-Pacific traffic recovery drive both OE demand (638 large-engine orders in 2025) and record aftermarket activity
OE delivery shortfalls keep older engines flying longer — shop visits rose 10% to 1,440 in 2025; RR is expanding MRO capacity to capture it
Defence budgets rising; >300 Leopard 2 engines (Dec 2025), Typhoon, AUKUS submarines, B-52/MV-75 ramps all RR-exposed
mtu gensets: data-centre revenue +35% in 2025, including bridging power for data centres awaiting grid connection; next-gen Series 4000 arrives 2028
positive but long-dated · Government-backed SMR programs across Europe; RR leads selections but first power is mid-2030s
SAF-compatible engines and UltraFan efficiency are the response; long-term demand risk if flying is taxed or constrained
Superalloy and casting constraints raise costs and gate output across the industry
Ecosystem & competitor graph
Suppliers feed the company; customers pull from it. Line thickness shows the strength of each tie (supply-chain dependency, customer earnings contribution). Hover to isolate a tie.
Airfoils, castings, fasteners for turbine hardware
Structural castings and forgings
Nickel superalloys and titanium mill products
Specialty alloys for hot-section components
Engine structures and risk-share partner
Fuel systems and engine controls
Turbine modules (former RR unit, now Bain Capital-owned); Trent risk-share partner. Private — no ticker
A350 (exclusive Trent XWB) and A330neo (exclusive Trent 7000)
787 (Trent 1000, competing with GE GEnx)
Major Trent-powered widebody operators paying per engine flying hour
Submarine reactors, Typhoon (EJ200), transport engines; part of >GBP 1.5B aftermarket contracts signed 2025 (with the US DoW)
F-35B LiftSystem, B-52 re-engine (F130), MV-75 (AE 1107), MQ-25
3-unit SMR project (3 x 470 MW, ~1,500 MWe) on the Varo Peninsula; RR SMR selected June 2026
SMR customer and strategic equity investor in Rolls-Royce SMR (~20% per 2024-25 announcements), with a commitment for up to six units; Temelin site work begun
UK SMR anchor: selected Jun 2025, Wylfa confirmed Nov 2025 (3 units; site capable of eight), contract signed Apr 2026; FID expected 2029
The widebody arch-rival (GE9X, GEnx vs Trent 1000) and CFM JV owner in narrowbody; larger installed base and aftermarket
GTF narrowbody franchise and military engines (F135); competes in defence propulsion and future fighter programs
CFM partner (50% of LEAP), leader in narrowbody; RISE open-fan program threatens to lock next-gen narrowbody away from RR
GTF risk-share partner and MRO powerhouse; competes for aftermarket work
BWRX-300 SMR was the losing finalist against RR SMR in Sweden's Videberg selection; competes for the same national nuclear programs
Naval nuclear + advanced reactors; competes in government nuclear niches
US light-water SMR design with NRC approval; rival for SMR mindshare and orders
US advanced fission startup targeting data-centre power — competes for the nuclear-for-AI narrative
Large gensets/backup power vs Power Systems (mtu) in data centres
High-speed engines and power generation vs mtu
Marine and energy power solutions vs Power Systems marine