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I’m still invested in Rolls-Royce (LSE:RR) shares, but it can hurt to write about them. That’s because I had to sell some of my holdings when we bought our family home. In short, I’d have had a lot more exposure to a surging stock.
So let’s take a more detailed look. The stock’s up 445% over the past 24 months. This means that £10,000 invested then would be worth an incredible £54,500. Needless to say, this is a very strong investment return.
What’s changed?
Rolls-Royce’s stock has surged, driven by a dramatic transformation under CEO Tufan Erginbilgiç, who took charge in January 2023. Erginbilgiç, a former BP executive known for his results-oriented leadership, initiated sweeping cultural and operational changes.
Early in his tenure, he described the company as a “burning platform“, emphasising the need for urgent transformation. His strategy focused on improving efficiency, renegotiating contracts, cutting costs, and fostering a performance-driven culture.
Key achievements include a significant rise in profitability and cash flow. In 2023, Rolls-Royce’s revenue grew 22%, and it swung to a £2.43bn statutory pretax profit from a £1.5bn loss in 2022. Free cash flow reached a record £1.29bn, more than double the prior year.
Erginbilgiç’s hands-on approach — personally approving major deals and renegotiating contracts — also reclaimed substantial lost revenue.
The company set ambitious mid-term targets, aiming to quadruple profits by 2027 with operating margins of 13-15%. These early successes energised employees and restored investor confidence, reflected in the stock’s meteoric rise. And finally, this transformation positioned Rolls-Royce as a high-performing, resilient business ready for sustainable growth. It’s now a stable platform for growth.
Still investable?
Some investors might be deterred by Rolls-Royce’s elevated share price, but the company’s rapid growth suggests it remains an attractive investment opportunity. The stock’s price-to-earnings (P/E) ratio has fallen from 85.9 times in 2021 to 31 times in 2024. This indicates improving profitability relative to its market value. Furthermore, Rolls-Royce’s 2026 P/E of 24.1 times suggests continued earnings growth expectations.
Moreover, the company’s price-to-earnings-to-growth (PEG) ratio of 1.17 is 39.1% lower than the sector average of 1.92, indicating potentially better value relative to its growth prospects. Notably, Rolls-Royce appears cheaper than its peer GE Aerospace which is currently trading at 37 times forward earnings and trades with a PEG ratio of 2.1.
While UK-listed companies typically trade with a discount to their US peers, there really aren’t many companies that operate specifically in this aerospace and defence space. The discount to GE appears unwarranted.
Navigating uncertainty
The Rolls-Royce business is booming. However, that doesn’t mean there aren’t risks to the investment hypothesis. For example, rising inflation could harm demand for travel while Trump’s tariffs — if the UK becomes a target — could harm exports to the US. Coupled with shareholder profit-taking, these are risks that need to be considered.
Nonetheless, the consensus is this stock could still trade higher. If my holding wasn’t already substantial compared to the size of my portfolio, I’d buy more. I think investors should consider it.
