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The performance of Rolls-Royce shares since CEO Tufan Erginbilgiç took the helm at the start of 2023 is astonishing. The shares have increased nearly 14-fold to even outperform the poster child of the dominant AI theme Nvidia. At the time of writing they have just outmatched the chip giant on a total returns basis (encompassing share price gains and dividends) over that period.
What is behind the recovery?
How has Erginbilgiç achieved this turnaround in fortunes? There is little doubt that he has been helped by the backdrop. The return to a level of normality in the aviation space coming out of the pandemic has helped boost engine flying hours which, in turn, increases the amount Rolls can achieve in lucrative spares and repairs revenue on its large installed base of engines.
However, Rolls’ problems, particularly with generating cash flow and the durability of its engines, predate the pandemic so the astonishing recovery cannot simply be attributed to improved market conditions.
Some of the initiatives launched by Erginbilgiç have included a shake-up of the management team – which encompassed bringing in fellow BP alumni Helen McCabe as chief financial officer – and a cull of middle managers in the business.
He has applied a framework of four ‘pillars’ to achieve his goals. This includes ‘holding up a mirror’ to make clear how dire the company’s position was. This was evident when he addressed staff in the early weeks of his tenure and described Rolls as a “burning platform”.
The second pillar involved setting a clear strategy which would resonate with Rolls’ large workforce (of more than 40,000). Third, involved managing performance with clear targets and fourth aimed to deliver the previous three with pace and intensity.
One of the most important individual things Erginbilgiç has done is to renegotiate previously lossmaking sales and supply contracts with its airline customers. Investment in the reliability of its engines supported this process and the impact this has had on profit and cash flow is marked.
In February 2025 the company announced it would hit 2027 targets for operating profit two years early. After a strong first-half performance it lifted its 2025 guidance yet again from £2.7 billion to £2.9 billion to between £3.1 billion and £3.2 billion and lifted free cash flow guidance to between £3 billion to £3.1 billion.
At the peak of its cash problems in the middle of the last decade, the company’s cash flow was a paltry £179 million.
What is Rolls-Royce’s competition?
Rolls’ main rivals include, from the US, GE Aerospace and Pratt & Whitney (a subsidiary of RTX Corp) as well as France’s Safran and Germany’s MTU Aero Engines.
Where is future growth coming from?
There is no question Erginbilgiç has done a fantastic job on almost any measure but the question investors will be asking is what comes next? These questions are leant greater weight by the company’s valuation as, to justify an elevated valuation, a company typically needs to deliver significant growth.
Rolls currently trades at more than 40 times expected 2026 earnings compared with a 10-year average multiple of around 15 times. It also trades at a premium to some of its peer group.
In the civil aerospace arena, the potential untapped opportunity for Rolls-Royce lies in narrow-body planes. Rolls exited this market in 2012 to focus exclusively on the wide-body engines in larger planes used on long haul flights. Yet around 85% of commercial aircraft sales fall into the narrow-body category.
The company is keen to get a slice of this action using its new UltraFan technology, though the complexity and set-up costs involved mean it is looking to bring on board a partner – with US counterpart Pratt & Whitney reported to be in the frame.
It also needs to strike a deal with one of the world’s two main plane manufacturers, Airbus or Boeing. There are suggestions Airbus might be leaning in another direction for its next generation of narrow-body planes which could be an obstacle for Rolls.
The company’s defence business is a market leader in engines for military transport and patrol aircraft, with repair and maintenance again a vital component of its work. It also has a significant footprint in the naval space and is the sole provider of powerplants for the UK nuclear submarine fleet.
Like other defence companies, Rolls is benefiting from a step change in European military spending as countries respond to a shift in US foreign policy. Given its significant exposure to the nuclear submarine agreement between the UK, US and Australia (Aukus), there will be relief that Washington has reaffirmed its commitment to the deal after a review conducted in 2025.
Rolls-Royce – a breakdown
As the chart shows, civil aerospace accounts for well in excess of half of the group’s revenue, cash flow and operating profit. The remainder is almost entirely accounted for by its power systems and defence arms.
What about nuclear energy?
While it currently makes no contribution in terms of profit and cash flow there is also significant excitement about Rolls’ involvement in small modular reactors which are supposed to be more compact, simpler, cheaper and quicker to get up and running than conventional nuclear energy assets.
It is worth adding the proviso that this is, as yet, a relatively untested technology but in November 2025 it was announced Rolls would site three SMRs on Anglesey with the UK government investing £2.5 billion in the project.
In a world where artificial intelligence is consuming huge amounts of power, nuclear energy is increasingly being seen as a relatively clean and reliable solution. The company’s power systems arm is already benefiting from the significant energy demands associated with AI.
This business, historically known for supplying diesel and gas engines to hospitals, ships, and military bases, expanding into the data centre market that powers artificial intelligence.
Tom Sieber: Content Editor
Tom Sieber is AJ Bell's Content Editor. He was previously the Editor of Shares Magazine. He has been with the business since 2012.
Tom is a regular contributor to the AJ Bell Money & Markets...
