Rolls-Royce: What We Think of the Stock After Earnings

Key Morningstar Metrics for Rolls-Royce Holdings

• Fair Value Estimate
  : GBX 1,520
• Morningstar Rating
  : ★★★
• Morningstar Economic Moat Rating
  : Narrow
• Morningstar Uncertainty Rating
  : High

What We Thought of Rolls-Royce Holdings’ Earnings

Rolls-Royce’s first-half revenue increased by 26% to £11.3 billion and operating profit 46% to £2.5 billion, lifting margin 3.1 percentage points to 22.5%. Management raised 2026 profit guidance to £4.7 billion-£4.9 billion and free cash flow to £3.8 billion-£4.0 billion.

Why it matters: The £700 million profit guidance increase reflects more than higher activity—civil LTSA repricing and contract improvements lifted aftermarket earnings, while defense and power systems converted volume, mix, and cost actions into respective margins of 21.0% and 20.3%.

• Civil profit rose 31%, but £497 million came from contract catch-ups and provision releases. These reflect better contract economics and lower expected costs but accelerate profit ahead of cash; net LTSA balance growth fell to £86 million from £472 million.
• Defense profit increased 57% on aftermarket, international sales mix, and self-help. Power systems profit rose 72% as data center and governmental growth, better pricing, and mix lifted margin; its £8.0 billion backlog increased 42%.

The bottom line: We maintain our GBX 1,520 per share fair value estimate. The results strengthen our forecasts, but much of the near-term civil beat reflects earlier recognition of improved lifetime contract economics. Defense and power systems provide another layer for maintained upside.

• Higher engine durability, lower shop-visit costs, and improved LTSA pricing lift civil cash beyond 2026. Power systems adds a second compounding service base as data center gas engines shift from backup to prime power, with materially higher utilization and aftermarket demand.