Image source: Rolls-Royce plc
I think most investors are now aware of the spectacular rise in Rolls-Royce’s (LSE: RR) share price.
But I also believe that many remain unaware of three key elements that could drive the shares even higher.
So, what are they?
It’s still comparatively undervalued
Rolls-Royce still looks very undervalued on the key price-to-earnings (P/E) ratio measure against its peers, and by a long way.
It currently trades at a ratio of just 14.9, while its competitor average is more than double that – at 30.1. These comprise Northrop Grumman at 20.1, BAE Systems at 24.9, RTX a 35.2, and TransDigm at 40.3.
This is important because it shows how a stock’s price has performed relative to the earnings it generated. And earnings are what power any firm’s share price higher over time.
The P/E measure just used is the default ‘trailing’ version, which looks at earnings already generated.
But ‘forward P/E’ incorporates analysts’ consensus forecasts for earnings in the coming 12 months. Here as well, Rolls-Royce is very undervalued – at 22.5 against a peer average of 28.3.
Everything everywhere all at once
Exceptional growth is still occurring across Rolls-Royce’s three core businesses.
In Civil Aerospace, large-engine flying hours now exceed pre-Covid levels, structurally boosting service revenues. The Trent XWB-97 engine remains in strong demand from carriers, with upgrades extending flying time and profitability. Civil Aerospace margins hit a stunning 24.9% in H1 2025.
In Power Systems, the 13 November update flagged strong order intake and revenue growth, driven by data centres and governments. October saw the launch of a fast-start gas generator, available from 2026.
In Defence, demand continues from the Global Combat Air Programme, a UK-Italy-Japan stealth fighter project due around 2035. September brought expanded submarine partnerships, while October saw Turkey and the UK agree on 20 Eurofighter Typhoons powered by Rolls-Royce’s EJ200 engines.
Meanwhile, its Small Modular Reactor nuclear businessadvances in Sweden and the UK. It is also a key part of the US’s ‘Project Pele’. This is an initiative to develop a mobile nuclear microreactor for use at remote military bases.
A risk to this growth is any major failure in these products that could be expensive to remedy and could damage Rolls-Royce’s reputation.
Underestimates hide true expansion potential
Since 2023, when Tufan Erginbilgic became CEO, I think investors have been led to underestimate the likely scale of growth evident in existing figures.
Its 2025 underlying operating profit guidance was upgraded from £2.7bn-£2.9bn to £3.1bn-£3.2bn. However, H1’s figure was £1.733bn, implying a full-year number of £3.466bn, already ahead of the forecast.
The 2025 free cash flow forecast was increased from £2.7bn-£2.9bn to £3bn-£3.1bn. But H1’s number was £1.582bn, implying a full-year figure of £3.164bn.
Even Erginbilgic himself said: “We see these targets as a milestone, not a destination.”
My investment view
I believe the market continues to base its price expectations for Rolls-Royce on extremely conservative figures.
I believe the firm produces these so it can overachieve with each new set of results.
Consequently, as hinted at in the relative share price valuations, I think there is a major valuation gap in the stock.
As such, I will be adding to my existing holding in the firm at the earliest opportunity.
