Rolls-Royce's Reactor Program May Accelerate, Thanks To Data Center Capex Boom

Core Insights - Rolls-Royce Holdings (RYCEY) has demonstrated strong profitable growth, driven by a recovery in air travel and a strategic business model, with management projecting excellent growth through 2027 [1][2] - The stock has seen significant price increases, reflecting robust financial performance and positive market trends in the aerospace and defense sectors [1][2] Financial Performance - RYCEY reported H1'24 revenues of £8.18 billion, a decrease of 3.1% sequentially but an increase of 17.6% year-over-year, with operating margins at 14% [2] - The Civil Aerospace segment generated revenues of £4.11 billion, showing a 27% year-over-year increase, while the Defense segment reported revenues of £2.21 billion, up 18% year-over-year [2][3] Market Trends - The recovery in commercial travel and increasing orders for commercial aircraft are expected to continue, with Boeing projecting a 3% increase in airplane deliveries over the next 20 years [2] - RYCEY's order book for large engines stands at 1.77K, reflecting an 8.5% sequential increase and a 9% year-over-year increase, indicating strong demand in the Civil Aerospace sector [3] Nuclear Projects and Data Center Demand - The rise in data center power demand, driven by generative AI, presents opportunities for RYCEY's Power Generation Solutions, including Small Modular Reactors (SMRs) [4] - The Power Systems segment reported a growing H1'24 order intake of £2.4 billion, a 26.3% year-over-year increase, with a book-to-bill ratio of 1.3x [4] Shareholder Returns - RYCEY has reinstated dividends for FY2024 with a payout ratio of 30%, reflecting improved free cash flow and a healthier balance sheet [7] - The company has raised its FY2024 underlying operating profit guidance to £2.2 billion, a 38.3% year-over-year increase, and free cash flow guidance to £2.15 billion, a 67.9% year-over-year increase [7] Valuation and Investment Outlook - The updated fair value estimate for RYCEY stock is $6.10, indicating a potential upside of 23.5% to a long-term price target of $7.50 [9] - The reinstated dividends and potential for share repurchases suggest attractive total return prospects through capital appreciation and dividend payouts [9]