Few FTSE 100 stocks have rewarded investors like Rolls-Royce (LON:RR.). Since CEO Tufan Erginbilgic took charge in early 2023, the turnaround has been extraordinary, but what next? Rolls-Royce remains an excellent business, but it is no longer an obvious bargain.
The question for UK retail investors today is whether Rolls-Royce remains a buy after a remarkable three-year run, or whether much of the good news is already reflected in the share price.
| Rolls-Royce (LON:RR.) | Price: £12.35 (-2%) | Market cap: £101.2bn |
Performance vs FTSE 100
| Year | Rolls-Royce Share Price Return | FTSE 100 Return* | Outperformance |
| 2023 | +203% | c.+3.8% | +199.2% |
| 2024 | +90.7% | c.+5.7% | +85.0% |
| 2025 | +95.5% | c.+7% | +88.5% |
| 2026 YTD | +3.2% | c.+4% | -0.8% |
*Approximate price return basis. Rolls-Royce dividends were relatively small until recently.
Cumulative Returns Since Start of 2023
A £10,000 investment at the start of 2023 would have grown approximately to:
| Investment | Value Today |
| Rolls-Royce | ~£106,000 |
| FTSE 100 Tracker | ~£12,300 |
The scale of outperformance is almost unprecedented among large-cap UK stocks.
Why The Rally Happened
The market initially viewed Rolls-Royce as a post-pandemic recovery story. It has evolved into something much bigger.
Three factors drove the rerating:
- Civil Aerospace margins improved dramatically.
- Power Systems benefited from data-centre demand linked to AI infrastructure spending.
- Management consistently exceeded guidance and raised medium-term targets.
The company generated £3.46bn of underlying operating profit in 2025 and expects £4.0bn-4.2bn in 2026.
The Valuation Problem
The challenge today is valuation.
| Metric | 2023 | 2026 Today |
| Forward P/E | ~22x | ~32x |
| Price/Sales | 1.6x | ~5.0x |
| Market Value | ~£15bn | >£100bn |
Rolls-Royce is no longer priced as a turnaround stock. It is increasingly priced as a high-quality compounder.
That leaves less room for disappointment.
What Analysts Think
Current analyst sentiment remains positive.
| Measure | Value |
| Consensus Rating | Buy / Moderate Buy |
| Average Price Target | £13.90-£14.13 |
| Implied Upside | ~12%-14.5% |
Analysts still expect strong earnings growth through 2028, with EPS rising from ~37p in 2026 to 51.8p by 2028.
Reasons The Rally Could Continue
- Civil Aerospace flying hours remain below long-term growth potential.
- Defence spending is rising across Europe.
- Datacentre power demand is creating new growth opportunities.
- Small Modular Reactor (SMR) projects could become material later this decade.
- The company has announced substantial shareholder returns through dividends and buybacks.
Reasons To Be Cautious
- Expectations are extremely high.
- Shares trade on a premium valuation versus most FTSE 100 industrial companies.
- Aerospace remains cyclical.
- Any slowdown in aviation demand or execution issues could trigger a sharp derating.
- After a 900%+ move from the lows, future gains are likely to be much more modest.
Rolls-Royce Verdict
There is little evidence that the investment case has broken. Earnings, cash flow and guidance continue to improve. Rolls-Royce remains an excellent business, but it is no longer an obvious bargain. The stock now reflects much of the turnaround success and future growth opportunity.
Sell? Only if you’re very cautious. The company continues to outperform operationally and analysts still forecast earnings growth. There is currently insufficient evidence to justify a sell rating.
Has the three-year rally run out of steam? Not completely.
Remarkable recovery continues for Rolls-Royce
However, investors should probably expect a different phase of returns. The 200%-plus annual gains seen during the turnaround are unlikely to be repeated. From today’s valuation, future shareholder returns are more likely to come from earnings growth, dividends and buybacks rather than multiple expansion.
The business still looks attractive, but after one of the FTSE 100’s greatest ever rallies, the risk/reward balance is far less compelling than it was in 2023 or 2024.
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