Under CEO Tufan Erginbilgic’s leadership, Rolls Royce RR. has repositioned itself as a financially strong, high-margin, and cash-rich aerospace and defense leader. The reinstatement of the dividend, buyback program, and accelerated transformation reinforce its commitment to long-term value creation.
Key Morningstar Metrics for Rolls Royce
- Fair Value Estimate: GBX 960
- Morningstar Rating: ★★★★
- Economic Moat: Narrow
- Morningstar Uncertainty Rating: High
The company has executed well on commercial improvements, cost controls, and strengthening its balance-sheet, making it more resilient to industry shocks. As a result, we have revised our model, particularly for large engines with an updated fair value estimate of GBX 960; this is driven primarily by higher aftermarket margins reflecting improved long-term service agreement profitability.
Many LTSA contracts previously had low initial margins and became onerous due to the high costs of shop visits. Over the last three years, the company has renegotiated nearly all LTSA contracts, leading to higher cash margins and improved profitability. A key change has been unbundling LTSA agreements—previously, 40% were bundled with original equipment engine sales, limiting pricing flexibility.
Now, nearly 60% are unbundled, allowing for more profitable maintenance pricing. Additionally, extended time-on-wing for Trent engines has reduced maintenance costs while increasing per-hour revenue. We have also increased defense revenue projections as we now expect European defense spending to reach 3.1% of gross domestic product by 2029, up from 2.4%, and 3.5% by 2032 (previously 2.8%).
Rolls Royce to Capitalize on European Defense Expansion
We project defense revenue to grow at an 11% compound annual growth rate in the midterm with operating margins rising from 14.2% to 15.9% by 2029. Additionally, Rolls Royce has completed major debt restructuring, transforming its financial position from high leverage to a net cash-positive balance sheet while regaining investment-grade status. As a result, we reduced our cost of debt in the weighted average cost of capital calculation to align it with industry peers.
This financial transformation is one of the most dramatic turnarounds in aerospace. With its strongest balance sheet in a decade and projected robust free cash flow, Rolls Royce is well positioned to maintain higher shareholder returns and strategic investments.
Rolls-Royce Holdings Stock vs. Morningstar Fair Value Estimate
Source: Morningstar Direct. Latest price as of 5:00 AM ET. Data as of March 04, 2025.
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