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Rolls-Royce (LSE: RR.) shares have enjoyed three blockbuster years, rocketing up 220%, then 95%, and finally 100% in the three years from 2023 to 2025. Could a fourth be on the cards?
If certain things fall into place, then another high double-digit year for the share price could take it to £25 or even beyond. Let’s look at what needs to happen for 2026 to be a monster.
Eyes open
A key date to keep an eye on is 26 February. This is when Rolls-Royce is reporting its full-year results. Each of the previous three years has been supported by an excellent update or two where expectations were beaten and guidance upgraded.
This should come as no surprise. These reports are when investors get their first look under the bonnet to see huge orders or increased earnings. It’s common to see huge swings in a share price when a company posts a terrific update (or the opposite!)
What could help in this regard? The increased military spending is one area. Governments have been ploughing billions into more hardware since the first Russian tanks rolled into Ukraine, and this bumps up the top and bottom lines for contractors like Rolls-Royce. The company produces engines for fighter jets and reactors for naval submarines, to give two examples.
This is also a risk for the stock too. I think we’re all happy about some of the recent conflicts drawing to a close recently. If the world grows ever more peaceful, then that will impact earnings and consequently the share price.
Longer-term
Another thing to note about Rolls-Royce is its valuation. The stock trades at around 37 times forward earnings currently – a very high value! This tends to mean the longer-term prospects are good and earnings growth is expected to rise.
A higher valuation is another way for a share price to rise even if earnings remain constant. That’s because investors are willing to pay more of a premium for a stock with growth on the horizon.
In Rolls-Royce’s case, the SMRs project is worth paying attention to. These little nuclear power plants are based on the same tech the company has been using for decades to power Royal Naval submarines. The idea is to harness nuclear energy for home and business purposes without the cost and overrun of current nuclear projects.
Another boost over the long term could be the company’s growing role in data centres like those used for AI. As power generation systems reach record highs on the back of artificial intelligence demand, Rolls-Royce made a big investment into one of its facilities in Minnesota this year.
Overall? A £25 target is a lofty goal and higher than any analyst is predicting, but there’s plenty to like here. I’d call the stock one to consider.
