Rolls-Royce Holdings plc (LSE: RR.) has become one of the most closely watched stocks on the FTSE 100 after delivering an astonishing 909% return over the past three years.
What started as a dramatic post-pandemic recovery story in 2022 has now evolved into a complex mix of structural turnaround, strategic wins, and speculative momentum.
With shares climbing 9.1% in the past month alone, the aerospace and defence giant is now entering a new phase—one that tests whether the recent gains can turn into lasting value for shareholders.
Government backing adds momentum to Rolls-Royce’s growth plan
On 10 June, the UK government confirmed its support for Rolls-Royce’s small modular nuclear reactor (SMR) programme, a move that marks a significant development in the company’s transition beyond traditional aviation.
The SMR initiative has the potential to unlock new revenue streams, particularly as global demand for cleaner energy infrastructure continues to grow. However, success will depend on securing international partnerships to scale the technology.
This development follows shortly after a solid update on 1 May, in which Rolls-Royce reaffirmed its full-year guidance for 2025, projecting an underlying operating profit of between £2.7 billion and £2.9 billion.
That confidence was underpinned by several business unit highlights: large engine flying hours in the Civil Aerospace division rose to 110% of 2019 levels, Defence orders remained robust, and Power Systems continued to expand on the back of surging demand from data centres.
From debt risks to buybacks: Financial strength has returned
Once seen as a company under immense financial strain, Rolls-Royce has made notable progress in reducing net debt and increasing shareholder returns.
The group has already completed £138 million of its planned £1 billion share buyback programme.
This marks a sharp contrast to the pandemic-era concerns over liquidity and debt sustainability, which had weighed heavily on investor sentiment in 2020 and early 2021.
The company’s turnaround under CEO Tufan Erginbilgic has focused on reshaping operations, improving margins, and building resilience across sectors.
With Civil Aerospace, Defence, and Power Systems all reporting steady growth, the group’s multi-pronged structure is proving beneficial amid changing macroeconomic conditions.
Valuation concerns emerge amid high expectations
Despite the strong financial recovery, analysts have flagged valuation risks. Rolls-Royce currently trades at a price-to-earnings (P/E) ratio of 44, suggesting high expectations are already baked into the stock.
Any signs of revenue softening or delayed project execution—especially in its SMR programme or Power Systems expansion—could prompt a market correction.
The stock’s performance is also vulnerable to macro shocks. The Civil Aerospace division, which remains a major profit driver, is tightly linked to global air travel.
Any downturn in passenger demand, oil price spikes, or geopolitical disruptions could impact engine sales and servicing revenue. Similarly, Power Systems could be exposed if growth in data centre investments slows.
Analyst ratings show mixed near-term sentiment
The average one-year share price target from 12 analysts stands at £859.6, suggesting a potential downside of around 1.5% from current levels.
However, the long-term sentiment remains optimistic. Of the 14 analysts providing stock recommendations, 10 rate it a Strong Buy, while two call it a Hold and two label it a Sell.
This divergence points to differing views on whether the company’s transformation is sustainable at its current valuation.
With its shares up more than 85% over the past year and nearly 10-fold over three years, Rolls-Royce has undeniably rewarded patient investors.
But as the company embarks on new ventures such as nuclear technology and continues to deliver on high growth expectations, the key question is whether it can keep delivering without a reset in investor expectations.
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