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Since Tufan Erginbilgic became CEO in 2023, Rolls‑Royce’s (LSE: RR) share price has staged one of the most dramatic turnarounds in modern FTSE history. It has gained around 1,155% from that point, having more than doubled in the past 12 months alone.
Crucially though, because a company’s share price is ultimately powered by earnings growth, there could still be big gains ahead. I believe this to be the case, with all three of its key businesses delivering accelerating profits and cash flow.
So, how sustainable do these look and is the share price looking undervalued right now?
Results reflect growing momentum
Rolls‑Royce’s recent results showed strong performance across the group, in line with its ongoing transformation programme.
This is a multi‑year overhaul launched under Erginbilgic to raise margins, strengthen cash flow and simplify the organisation. It combines deep cost reductions, tighter capital discipline and a shift toward higher‑quality recurring earnings across Civil Aerospace, Defence and Power Systems.
A key risk is any major product failure, which could be costly to fix and damage the company’s reputation.
However, its H1 2025 numbers published on 31 July saw operating profit rise 51% year on year to £1.7bn. Operating margins jumped from 14% to 19.1%, while free cash flow climbed 37% from £1.16bn to £1.58bn.
Consequently, the company raised its full-year 2025 guidance for operating profit to £3.1bn-£3.2bn and to £3bn-£3.1bn for free cash flow.
The 27 February-released full‑year 2024 numbers also showed strong progress across the group. Underlying operating profit rose 55% to £2.46bn, while operating margins increased from 10.3% to 13.8%. In the meantime, free cash flow soared 89% to £2.43bn.
Growth drivers ahead
Rolls‑Royce appears well positioned to sustain its earnings momentum, supported by several clear growth drivers across its core divisions.
Civil Aerospace should benefit from rising wide‑body aircraft utilisation and a strong pipeline of long‑term service agreements. The Trent XWB-97 engine remains heavily in demand from carriers, with upgrades extending flying time and improving profitability.
Defence products continue to see robust demand, with 5 December marking a £400m strategic collaboration agreement between Rolls‑Royce Submarines and NATO‑partner firms.
And its Power Systems division is set to deliver further margin expansion through pricing and efficiency gains. The 13 November update highlighted strong order intake and revenue growth driven by data centres and government customers. October saw the launch of a fast-start gas generator, available from 2026.
Alongside these near‑term drivers, Rolls‑Royce’s Small Modular Reactor programme offers a potential long‑term growth option. Industry forecasts are for the global SMR market to reach $72.4bn (£53.8bn) by 2033 and $295bn by 2043. This represents a compound annual growth rate of 30% during this period.
My investment view
Despite the huge gains over the past two years, Rolls‑Royce’s share price is still bottom of its competitor group on the key price-to-earnings valuation.
It trades on 16.6 times earnings, versus a peer average of 30.9. These include Northrop Grumman at 20.2, BAE Systems at 25.8, RTX at 37.3, and TransDigm at 40.1.
So, it is very undervalued on this basis.
Given this, and its strong earnings growth outlook, I will be adding to my holding in the company very soon.
I also have my eye on other stocks with high earnings growth forecasts that look very undervalued too.
