Rolls-Royce Soars on Earnings Beat

The renowned aircraft engine manufacturer beat market expectations again, increasing speculation of potential gains in other defense companies.

Flying Ever Higher

Rolls-Royce surged 15% at the market open on Thursday after reporting earnings that beat analyst forecasts. Investors cheered the company's progress in restoring profitability, improved mid-term guidance, confirmation of a dividend for the previous year (at 6p per share), and the announcement of a £1 billion share buyback programme. The cost-cutting and efficiency initiatives the company embarked on two years ago continue to pay off, and company executives have expressed confidence in further improvements, potentially supporting the upward trajectory after being among the top UK performers last year.

The company reported a 57% increase in operating profit over the previous year to £2.46 billion, exceeding analyst consensus. Also, it projected that this figure will rise between £3.6 and £ 3.9 billion in the medium term. CEO Tufan Erginbilgic highlighted achieving profit and free cash flow targets two years ahead of schedule as a reason for the upgrade in mid-term targets. Strong order delivery for widebody aircraft engines has supported growth, with Europe’s aviation industry particularly seeing a resurgence in demand.

Going Beyond

While the company’s earnings report focused on the broader aerospace industry, it also revealed defence-sector developments that suggest industry-wide effects. For instance, several new military contracts were sealed, including in the submarine and aircraft sectors. The CEO welcomed increased defence spending in the UK and Europe as the continent ramps expenditures to address potential threats from Russia. UK Prime Minister Keir Starmer had previously announced plans to increase defence spending to 2.5% of the economy by 2027.

UK defence companies, including BAE and Rolls Royce, saw their share prices boost earlier in the week following the German elections. After that, presumptive Chancellor Friedrich Merz announced a step-up in defence spending as part of a pledge to achieve "independence" from the US. The combination of new spending pledges from the UK and Germany helped support the FTSE 100 and offset weakness in other sectors, making defence one of the best performers in the blue-chip list this year.

Accelerated Trend

Breaking above the upper bound of a base channel, Rolls-Royce has now emerged in an accelerated trend, suggesting a potential continuation to 800 GBX to achieve the width of the channel. It could push prices towards the 1000 mark via resistance levels at 875 and 945 if this plays out. On the downside, a drop below 700 and the 650 regional floor might open the door to 560 and 520.

Source: SpreadEx / Rolls Royce

Key Takeaways

The UK’s Rolls-Royce announced an impressive earnings and guidance update that has not only improved investor confidence but also raised optimism about the broader defence sector. Spending pledges from the UK and Germany have also ramped up, with companies like BAE Systems and Rolls Royce well-positioned to capitalise on a trend potentially spreading into the entire industry.