Image source: Rolls-Royce Holdings plc
Rolls-Royce’s (LSE: RR) share price is trading its highest-ever levels. Consequently, some investors may think that the shares cannot possible rise any further. Others may think they have developed an unstoppable bullish momentum.
What I think is that it is value, not price, that counts. The former is whatever the market will pay for a stock at any given time. But value reflects the true worth of the underlying business fundamentals over time.
In Rolls-Royce’s case, I think the firm has been underpromising on what it can deliver in its forecasts. Consequently, I think that it is set to keep outperforming these forecasts and revealing additional value over the long term.
Underpromising to overdeliver
A risk to the firm is any failure in one of its core products. This could be expensive to rectify and could damage its reputation.
That said, Rolls-Royce results since 2023 have featured growth forecasts that look very conservative to me. And I am not the only one.
The latest numbers – 31 July’s H1 2025/26 results – saw operating profit soar 51% to £1.733bn. Operating margin increased 36% to 19.1% and earnings per share leapt 76% to 15.74p.
Return on capital rose 22% to 16.9%, and free cash flow increased 37% to £1.582bn.
Unsurprisingly given these performance gains, Rolls-Royce produced new upgraded forecasts. But more surprisingly to some – including me, UBS, and Morgan Stanley to name but three – it was already hitting some of these targets!
Specifically, for instance, its full-year 2025 underlying operating profit guidance was upgraded from £2.7bn-£2.9bn to £3.1bn-£3.2bn. But H1 2025’s figure was already £1.733bn, implying a full-year number of £3.466bn, already ahead of the forecast.
Similarly, the free cash flow forecast was bumped up from £2.7bn-£2.9bn to £3bn-£3.1bn. However, H1 2025’s number was already £1.582bn, implying a full-year figure of £3.164bn.
As UBS put it: “We believe it [Rolls-Royce’s upgraded guidance] will be taken as conservative.” And Morgan Stanley underlined that all three Rolls-Royce divisions are already operating within the 2028 margin guidance range.
Even Erginbilgic himself said: “We see these targets as a milestone, not a destination.”
My investment view
I think it is clear that Rolls-Royce has been underpromising to overdeliver ever since Tufan Erginbilgic took over as CEO. And I believe its latest set of forecasts fits into the same pattern. So, I am expecting significant outperformance again in the coming months and years.
Even now, Rolls-Royce still looks extremely undervalued to its peers, despite its major share price gains since 2023.
Specifically it trades at the bottom of its competitor group on the key price-to-earnings (P/E) ratio. Its P/E of 17 falls way behind the 31.8 average of its peers.
These comprise Northrup Grumman at 20.7, BAE Systems at 28.2, RTX at 36.3, and TransDigm at 42.1.
Each of these factors were in place when I first bought Rolls-Royce stock at around £7 in April. At that point, many analysts thought it had hit its peak, but it has since gained around 67%.
I believe this resulted from their looking at the forecasts in front of them, rather than understanding that these were underplayed.
It is the same reason why many think the stock is at peak pricing now, but I think differently.
Consequently, I will buy more of the shares as soon as possible.
