The 3 key factors investors are overlooking in Rolls-Royce’s share price story…
I think most investors are now aware of the spectacular rise in Rolls-Royceâs (LSE: RR) share price.
But I also believe that many remain unaware of three key elements that could drive the shares even higher.
So, what are they?
Itâs still comparatively undervalued
Rolls-Royce still looks very undervalued on the key price-to-earnings (P/E) ratio measure against its peers, and by a long way.
It currently trades at a ratio of just 14.9, while its competitor average is more than double that â at 30.1. These comprise Northrop Grumman at 20.1, BAE Systems at 24.9, RTX a 35.2, and TransDigm at 40.3.
This is important because it shows how a stockâs price has performed relative to the earnings it generated. And earnings are what power any firmâs share price higher over time.
The P/E measure just used is the default âtrailingâ version, which looks at earnings already generated.
But âforward P/Eâ incorporates analystsâ consensus forecasts for earnings in the coming 12 months. Here as well, Rolls-Royce is very undervalued â at 22.5 against a peer average of 28.3.
Everything everywhere all at once
Exceptional growth is still occurring across Rolls-Royceâs three core businesses.
In Civil Aerospace, large-engine flying hours now exceed pre-Covid levels, structurally boosting service revenues. The Trent XWB-97 engine remains in strong demand from carriers, with upgrades extending flying time and profitability. Civil Aerospace margins hit a stunning 24.9% in H1 2025.
In Power Systems, the 13 November update flagged strong order intake and revenue growth, driven by data centres and governments. October saw the launch of a fast-start gas generator, available from 2026.
In Defence, demand continues from the Global Combat Air Programme, a UK-Italy-Japan stealth fighter project due around 2035. September brought expanded submarine partnerships, while October saw Turkey and the UK agree on 20 Eurofighter Typhoons powered by Rolls-Royceâs EJ200 engines.
Meanwhile, its Small Modular Reactor nuclear businessadvances in Sweden and the UK. It is also a key part of the USâs âProject Peleâ. This is an initiative to develop a mobile nuclear microreactor for use at remote military bases.
A risk to this growth is any major failure in these products that could be expensive to remedy and could damage Rolls-Royceâs reputation.
Underestimates hide true expansion potential
Since 2023, when Tufan Erginbilgic became CEO, I think investors have been led to underestimate the likely scale of growth evident in existing figures.
Its 2025 underlying operating profit guidance was upgraded from £2.7bn-£2.9bn to £3.1bn-£3.2bn. However, H1âs figure was £1.733bn, implying a full-year number of £3.466bn, already ahead of the forecast.
The 2025 free cash flow forecast was increased from £2.7bn-£2.9bn to £3bn-£3.1bn. But H1âs number was £1.582bn, implying a full-year figure of £3.164bn.
Even Erginbilgic himself said: âWe see these targets as a milestone, not a destination.â
My investment view
I believe the market continues to base its price expectations for Rolls-Royce on extremely conservative figures.
I believe the firm produces these so it can overachieve with each new set of results.
Consequently, as hinted at in the relative share price valuations, I think there is a major valuation gap in the stock.
As such, I will be adding to my existing holding in the firm at the earliest opportunity.
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More reading
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Simon Watkins has positions in BAE Systems and Rolls-Royce Plc. The Motley Fool UK has recommended BAE Systems and Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
