Rolls-Royce: Set To Reach New Heights Ahead, Initiate Buy

Core Thesis - Rolls-Royce Holdings (RYCEY) has successfully reversed its fortunes, particularly in its Civil Aerospace, Defense, and Power Systems segments, leading to a compelling investment thesis [1][4]. Revenue Performance - RYCEY reported total revenues of £15.4 billion in FY2023, reflecting a 21% year-over-year increase, with a significant operating profit of £1.59 billion, up 143% year-over-year [3][15]. - The Civil Aerospace segment was the primary driver, generating £7.34 billion (+29% YoY) in revenue and £850 million (+497% YoY) in operating profit [4][15]. Financial Recovery - The company faced challenges during the COVID-19 pandemic, leading to cash flow issues and a significant increase in shares outstanding from 1.9 billion in FY2019 to 8.4 billion in FY2023 due to capital raises [5][7]. - RYCEY's stock price has rebounded by 607.8% since the October 2022 low, outperforming the broader market [14][9]. Future Projections - The company anticipates operating profits of £1.85 billion (+16.3% YoY) and Free Cash Flow of £1.8 billion (+40.6% YoY) for FY2024, indicating a strong turnaround [17]. - Consensus estimates project a revenue CAGR of 8.3% and EBIT CAGR of 16.3% through FY2026, reflecting improved growth expectations compared to previous estimates [19][20]. Balance Sheet Health - RYCEY's cash and equivalents increased to £3.78 billion (+45.3% YoY), while debts decreased slightly to £4.04 billion (-1.4% YoY), resulting in a healthier balance sheet with net debts of -£0.26 billion [16]. - The company is expected to potentially reinstate dividends or buy back shares once it achieves an investment-grade credit rating, projected by Fitch Ratings for 2025 [25]. Valuation Metrics - RYCEY is currently trading at a forward P/E of 27.64x, which is higher than its 1-year mean but offers a reasonable margin of safety compared to peers [23][24]. - The stock is estimated to have a long-term price target of $7.50, indicating a potential upside of 39.4% based on consensus FY2026 EPS estimates [24].