Image source: Rolls-Royce plc
Since Tufan Erginbilgic took over as Rolls-Royce’s (LSE: RR) CEO in January 2023 its share price has risen 1,083%. At regular intervals along that price journey, investors have questioned whether the stock has reached peak value.
And rightly so – investors should always be rigorously assessing the price-to-value proposition of their holdings. After all, the two elements are not the same. Price is whatever the market will pay for a stock, while value reflects the fundamental worth of the underlying business.
So, it could be that following a 1,000%+ rise, there is no value left in Rolls-Royce shares. Or it could be that there is plenty of value left as the firm continues to increase its fundamental worth.
I took a deep dive into the business and ran some key numbers to find out the truth here.
Is the share price currently overvalued?
On the key price-to-earnings ratio, Rolls-Royce shares are trading at 15.3 right now.
This is bottom of its competitor group, despite the enormous price rise since Erginbilgic became CEO.
These peers comprise Northrup Grumman at 21.3, BAE Systems at 26.7, RTX at 34.8, and TransDigm at 44.9.
So, Rolls-Royce still looks very undervalued on this basis.
Do recent results support this view?
At the end of Erginbilgic’s first year as CEO, underlying operating profit increased 144% year on year to £1.590bn. This came on the back of a more than doubling in its operating margin to 10.3%.
These, in turn, drove a record free cash flow of £1.285bn – up 154% from 2022. This in itself can be a powerful driver for growth, and so it has proven.
At that point, its 2024 forecast numbers were for underlying operating profit of £1.7bn-£2bn and free cash flow of £1.7bn-£1.9bn.
However, its actual 2024 results saw underlying operating profit well surpass that forecast – at £2.464bn, up 55% on 2023. Free cash flow also dramatically overshot the previous projection – at £2.425bn, up 89% on 2023.
What are the current growth forecasts?
The 2025 forecasts at that stage were for £2.7bn-£2.9bn of underlying operating profit and £2.7bn-£2.9bn free cash flow.
Its mid-term forecasts (to 2028) were for underlying operating profit of £3.6bn-£3.9bn and free cash flow of £4.2bn-£4.5bn. A risk to these is a failure in any of the firm’s core products, which could damage its reputation and prove costly to fix.
That said, Rolls-Royce clearly said that these targets are “a milestone, not a destination”. It added: “We see strong growth prospects beyond the mid-term.”
Indeed, as early as its H1 2025 results, the underlying operating profit forecast jumped to £3.1bn-£3.2bn and its free cash flow projection to £3bn-£3.1bn!
Even more striking to me was that several of these core performance measurement’s upgraded forecasts look extremely conservative. Most notably, for example, operating margin is at 19% compared to 2028’s forecast of 15%-17%.
My investment view
I think Rolls-Royce consistently under-promises on its key growth metrics in order to over-deliver later.
UBS said the same sort of things after the H1 results. Specifically: “Consensus is likely to upgrade 2028 and long-term estimates in response to this print [forecast].”
Given that the forecasts I think are likely to be overshot are already excellent, I will buy more of the shares very soon.
