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Rolls-Royce (LSE:RR) shares have fallen 7% in the past few days, despite the FTSE 100 engine maker delivering reassuring Q3 numbers on 13 November.
Even so, RBC Capital Markets hasn’t been put off. The broker initiated coverage on Rolls-Royce yesterday (18 November) with an Outperform rating. It also slapped a 1,275p price target on the stock, which is nearly 20% above the current level of 1,066p.
After a troubled prior decade, Rolls has moved in the last few years into a steadier delivery phase, as operating performance has been more consistent, and engine durability impacts have been reduced.
RBC Capital Markets.
Rolls-Royce and GE Aerospace form a near duopoly for engines on widebody commercial aircraft. And with no major new widebody programmes expected until at least 2040, RBC says the civil engine business will stay in cash-harvesting mode for years.
SMR progress
RBC’s numbers didn’t include potential future market opportunities like Ultrafan, Rolls-Royce’s next-generation engine programme, and small modular reactors (SMRs). We had news about the latter last week when it was announced that the UK’s first three SMRs will be built on the island of Anglesey.
Meanwhile, Rolls-Royce is in the final stage of Sweden’s nuclear technology competition, along with US group GE Vernova. So that could be another three SMRs to go along with the upwards of six confirmed for the Czech Republic.
Each unit’s expected to cost between £2bn and £3bn, with high single-digit margins. So even though Rolls-Royce only owns 55% of the SMR venture, this could still end up as a significant growth driver.
Romania, the Netherlands, the US, and other countries are also pursuing SMRs. But the market is getting quite competitive. For example, after considering Rolls-Royce, Poland ended up going with GE Hitachi Nuclear Energy for its first mini reactors. So competition adds risk.
Also, these SMRs won’t be generating power until the mid-2030s. It’s therefore possible that manufacturing and supply chain snags could end up delaying deployment.
That said, Rolls-Royce doesn’t have to wait till 2034 to start making money. Management expects this business to be firmly profitable and free cash flow positive by 2030.
I think if we are not market leaders in SMRs globally, I think we did something wrong, because we are the leading company right now. So that’s the potential you may want to think about in this business.
CEO Tufan Erginbilgiç.
Q3
As for Q3, there was little to be concerned about for shareholders. Rolls-Royce still expects £3.1bn-£3.2bn in full-year underlying operation profit, and free cash flow of £3bn-£3.1bn.
Large engine flying hours for the first 10 months of 2025 increased 8% year on year, reaching 109% of pre-pandemic levels. And big engine orders from the likes of IndiGo and Malaysia Airlines have come in over the past few months.
Meanwhile, defence demand remains “robust“, while the Power Systems division is enjoying growth from back-up systems needed for data centres.
10% dip
Despite dipping 10% since the end of September, the shares still aren’t cheap at 33 times forward earnings. But with the company performing strongly and having plenty of future growth left in the tank, investors might want to consider buying the dip.
Given I already hold the shares though, I’m currently exploring other buying opportunities.
