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Rolls-Royce (LSE: RR) has become a FTSE 100 juggernaut, there’s no other way to describe it now. The shares jumped another 10% today (31 July) after the engine maker hiked its profit guidance yet again.
It means the company is now the fifth largest on the London Stock Exchange, with a £92bn market cap.
Interestingly, this latest rise means Rolls is outdoing Nvidia stock, with an incredible year-to-date gain of 89% versus 39% for the AI chipmaker. It’s also outperforming over one (+137%) and three years (+1,100%).
Nvidia still wins out across five years (+1,600%), but Rolls is catching up (+1,200%).
Back in March 2023, I wrote: “I’ve become increasingly bullish on Rolls. In fact, I think we could be in the foothills of a massive multi-year turnaround in the share price.”
Note the words “multi-year turnaround”. We’re only two and a bit years on and the stock is up over 600%! I was bullish, but I didn’t see this coming!
Cracking results (again)
The headline-grabbing bit from today’s first-half results was that underlying operating profit rocketed by 50% to £1.7bn. This was a massive beat, driven by stronger-than-expected aftermarket margins in Civil Aerospace and surging demand for data centre power generation.
It enabled management to upgrade full-year underlying operating profit guidance to £3.1bn-£3.2bn (up from £2.7bn-£2.9bn). Free cash flow should also be higher than previously anticipated.
And while Defence revenue growth was broadly flat at £2.2bn, there was a one-off benefit last year. Excluding that, growth was 10%, while the order backlog was at a record £18.8bn.
CEO Tufan Erginbilgiç commented: “Our multi-year transformation continues to deliver. Our actions led to strong first half year results, despite the challenges of the supply chain and tariffs. We are continuing to expand the earnings and cash potential of Rolls-Royce.”
SMRs are becoming part of the picture
Meanwhile, the small modular reactor business (Rolls-Royce SMR) was recently chosen to build three SMR units in the UK.
While contract terms are expected to be finalised in the fourth quarter, the company confirmed that the project will start to generate revenues and profit from late 2025 onwards, with positive cash flows throughout.
And by 2030, it expects Rolls-Royce SMR to be profitable and free cash flow positive, well before the first SMR is connected to the grid by the mid-2030s.
What’s exciting here is that the long-term international opportunity is simply massive, with Sweden, Poland, and other European nations very interested in SMRs. The Czech Republic has already selected Rolls as a provider.
Valuation risk is worth bearing in mind
What I find most impressive here is that Rolls-Royce is achieving this progress while navigating supply chain disruptions and inflation. Without those, the results would be even better.
That said, tariffs and global trade uncertainty continues. Management says the number of critical suppliers on its watchlist stands at 10. That’s down from 15, but it still indicates that the supply chain challenges haven’t gone away.
Investors considering the stock should be aware that the forward price-to-earnings multiple is now at around 40. That’s a mighty premium.
Clearly, we’re well past the foothills of this turnaround now, but I doubt we’re near the summit just yet. So I’ll be holding onto my shares, especially after today’s fantastic update.
