Rolls-Royce Shares: Analysts Weigh High Valuation Against Robust Growth Drivers

Rolls-Royce GB00B63H8491

Rolls-Royce equity has delivered a staggering gain exceeding 123% over the past year. This remarkable ascent follows a successful corporate turnaround, with market sentiment now being fueled by defense contracts and an unexpected surge in data center-related business. However, the stock's substantial re-rating prompts a critical question among investors: do the growth prospects justify the current premium valuation?

The fundamental case for optimism is strongly supported by a dramatic improvement in the company's financial health. Just three years ago, Rolls-Royce was burdened by a debt pile of approximately £5.2 billion. Today, the group reports a net cash position surpassing £1 billion. This strengthened balance sheet has enabled management to initiate a £200 million share buyback program, a clear signal of regained corporate confidence and a commitment to returning value to shareholders.

Defense and Data Centers: Dual Engines for Growth

Two key segments are powering the long-term growth narrative. The tense geopolitical climate continues to bolster defense stocks across Europe. Rolls-Royce's Power Systems division is a particular beneficiary, as government investments in defense often materialize more rapidly than funding for long-term, large-scale infrastructure projects.

Simultaneously, the business serving data centers has emerged as a surprising and potent growth vector. The company has reported an 85% year-on-year increase in orders received for this segment. Strategic victories, such as the collaboration with the UK's Royal Navy on its submarine program, further contribute to the positive outlook.

Analyst Outlook: Elevated Targets Amid Valuation Concerns

This dynamic operational performance has drawn focused attention from market analysts. Swiss banking giant UBS has significantly raised its price target for the engine manufacturer. The bank's experts point to underestimated potential within the power generation business, forecasting a 26% growth in revenue for this segment by 2028. They suggest that profits for the Power Systems division could surge by up to 60%, driven by the artificial intelligence boom and the substantial energy demands of modern data centers.

Yet, success has come at a cost. The stock now trades at an estimated price-to-earnings (P/E) ratio above 36, a valuation level that sits notably higher than many of its peers in the aerospace and defense industry. Analysts at Morningstar, for instance, believe the fair value of the shares is below current market prices.

All eyes are now on February 26, 2026. On this date, the company is scheduled to release its full-year results and provide crucial details regarding the future scope of its share repurchase initiatives. These announcements will serve as key data points for investors assessing whether the elevated valuation can be sustained.