Rolls-Royce Shares: Diverging Analyst Views Amid a New Growth Engine

Rolls-Royce GB00B63H8491

The stock of aerospace and power systems giant Rolls-Royce has been a standout performer, more than doubling in value over the past year. This impressive rally, however, has led to a split in analyst opinion. While some warn of a stretched valuation following such a sharp advance, others, including UBS, point to significant untapped potential, particularly from an emerging business segment.

Following a 117.17% surge over the last twelve months, the equity has recently taken a breather. It retreated 5.75% on a weekly basis to €15.08, leaving it approximately 6% below its 52-week high. The central debate now revolves around whether the current share price fully reflects the company's future growth prospects.

Concerns are mounting over the stock's premium valuation. Rolls-Royce currently trades at a forward price-to-earnings (P/E) ratio exceeding 36, a significant premium to defense peers like BAE Systems and Babcock, which trade at multiples below 30. Analysts at Morningstar have expressed caution, suggesting the fair value of the shares is notably below the current trading level and warning of limited near-term upside.

UBS Bullish on "Power Systems" Transformation

In contrast, UBS analyst Ian Douglas-Pennant has adopted a notably bullish stance, significantly raising his price target from 1,350 pence to 1,625 pence. This optimism is not primarily rooted in the company's traditional defense business, which continues to benefit from geopolitical tensions and calls for increased military spending, including from former US President Donald Trump.

Instead, UBS highlights the remarkable growth trajectory of the Power Systems division. The unit, historically known for manufacturing engines for marine and submarine applications, is capitalizing on a lucrative new market: power generation for data centers. The soaring energy demands of artificial intelligence applications are a key driver. Order intake for Power Systems has skyrocketed by 85% year-over-year. Douglas-Pennant forecasts a 26% compound annual growth rate for the power generation business from 2024 through 2028, with segment EBIT potentially expanding by up to 60% by 2028.

CFO Helen McCabe has emphasized that the most dynamic growth is currently not in the core defense operations but within this very segment.

Investor Focus Shifts to Key Dates and Projects

Market participants are now looking ahead to February 26, 2026, when Rolls-Royce is scheduled to release its full-year results. This update is highly anticipated for further details on the company's capital allocation strategy, including potential updates on its share buyback program.

Additionally, progress on the company's small modular reactor (SMR) nuclear project remains a focal point. The initiative, for which Rolls-Royce has already secured government funding, represents a long-term strategic growth avenue that could further diversify the company's energy portfolio beyond its recent data center success.