Rolls-Royce shares have been trading sideways recently, recovering from a year-to-date low of 1,159p to around 1,264p, yet still well off the 1,586p peak reached earlier this year. Despite the pullback, Morningstar analyst Ollie Smith believes the stock is undervalued and sees fair value at 1,520p, representing a potential 20% rebound from current levels.
Defense and aviation tailwinds
Smith points to sustained demand for Rolls-Royce products, particularly from European governments' rearmament efforts and a supercycle in civil aviation. He notes that investors will need to wait for the company's next trading update on Nov. 12 to see if these trends translate into upgraded guidance. The analyst also questions whether 2027 can match the impressive defense stock gains seen in 2025.
Peer results weigh on sentiment
The stock dipped after competitors GE Aerospace and Safran reported earnings. Safran highlighted weakness in its aftermarket business as airlines cut flights due to rising jet fuel prices. GE Aerospace beat estimates but issued softer-than-expected fourth-quarter guidance and flagged cost pressures. Both stocks have since pared some losses, but the sector remains under pressure.
Upcoming earnings as a catalyst
Rolls-Royce's next earnings report is the key near-term catalyst. In the first half, underlying profit surged 46% to £2.5 billion, and free cash flow reached £2 billion. The company raised its full-year underlying profit forecast to between £4.7 billion and £4.9 billion, despite industry headwinds.
Technical picture mixed
On the daily chart, the stock bounced off the 1,159p low, which coincided with an ascending trendline dating back to November last year. However, it remains capped below the 200-day moving average and is forming a bearish flag pattern. Near-term direction may depend on external factors, such as the outcome of the US-Iran conflict.
This article is for informational purposes only and does not constitute financial advice.
