A Rolls-Royce aircraft engine on view during the Hannover Messe industrial trade fair on March 31, 2025.
Ronny Hartmann | Afp | Getty Images
Rolls-Royce shares have hit fresh record highs every single trading day so far this year, as the aerospace and defense firm reaps benefits from multiple directions – from its exposure to defense, to its thriving power systems business and a wider FTSE 100 rally.
The broad theme for the company has lately been one around defense, and that has swept up the stock, leading to a nearly 1,200% gain over the past five years.
Shares rose as much as 1.2% in early trading, building on a 10% rise in 2026, however it is still trailing other European defense stocks such as Rheinmetall, Leonardo, Saab and BAE Systems as geopolitical tensions stir markets.
Early 2026 saw the U.S. conducting a large-scale attack on Venezuela, capturing its leader Nicolas Maduro, as well as subsequent talk about President Donald Trump wanting to take control over Greenland, followed by big moves in defense stocks.
But Rolls-Royce isn’t simply a defense company. Its defense business only accounts for about 25% of underlying revenue, and barely grew year-on-year in its last reported half-year results.
Rolls-Royce stock continued it’s multi-year rally in 2026.
“Interestingly, in the short term, where we see the impact of [defense] growth show up is not in our defense business, it’s actually in our power systems business, which has a governmental cycle, and we’ve got a leading position in land and naval defense there, and they tend to work in shorter cycles,” CFO Helen McCabe told CNBC’s “Squawk Box Europe” in July.
Its power systems segment, which manufactures engines for ships and submarines, also houses its data centers business, which McCabe said had “huge potential,” with order intake increasing by 85% year-on-year.
Rolls-Royce’s largest business by revenue, the civil aerospace unit which makes jet engines for commercial aircraft like Boeing and Airbus, is a long-term turnaround story, said UBS analyst Ian Douglas-Pennant on Friday, as he hiked his price target on the stock to 1,625p from 1,350p.
The price target increase was due to upgraded expectations for growth in power generation sales 2028 to 26% from 20% for 2024-2028, Douglas-Pennant said, citing accretive data center sales.
With the upgraded sales outlook, profitability (earnings before interest and taxes, or EBIT) in the power business could increase by as much as 60% by 2028, he added.
Rolls-Royce has an emerging business of energy generation and in June received government backing to build the U.K.’s first small modular nuclear reactor.
One potential concern for investors is that with the spike in share price, the stock’s price-to-earnings ratio for the coming 12 months has reached over 36, according to LSEG, a valuation higher than most of its peers.
Investors are now looking ahead to full-year results slated for Feb. 26, and will closely monitor news on its upcoming share buyback program, announced in December.
— CNBC’s Sam Meredith contributed to this report