Rolls-Royce: Room For Earnings Upgrades

Core Viewpoint - Post-pandemic aircraft demand exceeds supply due to traffic growth and fleet retirement, while supply chain issues persist, particularly with Boeing and Airbus, providing pricing power that is expected to boost earnings through 2026 [2][12]. Industry Overview - The aircraft industry is experiencing a demand surge, with civil aircraft demand projected to grow over 7% long-term [6]. - The supply chain challenges include engine recalls at Pratt Whitney and production delays at Rolls-Royce and GE Aerospace, which are contributing to pricing power in the sector [2]. Company Performance - Rolls-Royce has significantly underperformed its peers over the last decade, with a share price drop of nearly 90% during the pandemic before recent restructuring efforts [3][12]. - The company has three main business segments: Civil Aerospace (50% of revenue), Defense (25%), and Power Systems (25%) [5]. Revenue and Growth Projections - Rolls-Royce's revenue is expected to increase from GBP 15.4 billion in 2023 to GBP 19.4 billion by 2026, with an EBIT margin projected to rise from 10% in 2023 to 13%-15% in the medium term [10][12]. - The defense segment is anticipated to benefit from increased NATO spending due to geopolitical tensions [9]. Valuation and Market Position - The stock has surpassed the consensus price target of GBP 4.6, with a potential price target of GBP 5.8, indicating a 19% upside based on conservative estimates [12][17]. - Rolls-Royce's valuation metrics suggest it is not expensive relative to growth or peers, with a projected P/E (cash) of 17x [12][14]. Competitive Landscape - Rolls-Royce holds an 18% share in the civil aerospace market, while GE dominates with a 35% share [6]. - The company is focused on the wide-body and executive jet markets, which are critical for its growth strategy [7]. Conclusion - The company is rated a Buy due to strong demand across its segments and potential for earnings upgrades following interim results [17].