Rolls-Royce share price continued its strong rally this week and is now sitting at a record high of 1,570p. It has jumped by over 46% from its lowest level this year and by 1,295% in the last five years, making it one of the best-performing companies in the FTSE 100 Index. So, why has this industrial giant continued its surge?
Why the Rolls-Royce share price has soared
Rolls-Royce Holdings is a top industrial company with sprawling operations in key industries like civilian aerospace, defense, small modular reactor (SMR), and power businesses.
It has become one of the top players in the wide-body aircraft industry, with its engines being used in Airbus A350, A330neo, and some Boeing Dreamliners.
The company makes money by building these engines and entering long-term service contracts with its clients. In some instances, it is willing to sell the engine at a tiny profit margin and then recoup the cash from these contracts.
Under its “power by the hour” model, airlines pay based on engine usage, creating a recurring, high-margin revenue stream throughout an engine’s life.
This business has done well since the pandemic, as demand for flying has continued rising.
At the same time, Rolls-Royce has benefited from the ongoing demand for its engines in the defense industry as geopolitical risks have increased. Countries in their key markets have all boosted their defense spending in this period.
Most importantly, the company is also benefiting from the ongoing artificial intelligence boom, with its engines being used by hyperscalers in their data centers. Also, its SMR business has received several large orders.
Revenue and profitability growth
Rolls-Royce stock has done well because of its strong revenue and profitability growth, which is expected to continue this year.
In its first half earnings report, the company said that its operating profit jumped by 46% YoY to £2.5 billion.
This growth happened even after the US-Iran war disrupted its civil aviation business and boosted its costs.
In fact, despite the rising costs, its operating margin jumped to 22.5%, with its free cash flow hitting £2 billion.
The civil aviation business had an operating margin of 25.3%, while defense and power systems had 21% and 20.3%, respectively. This growth has helped the company to return cash to investors, something it had paused during the pandemic.
It will pay a 6p per share dividend in September and has completed £1.4 billion of the planned £2.5 billion share repurchase program.
Its goal is to buy back shares worth between £7 billion and £9 billion.
Rolls-Royce stock price chart analysis
RR stock chart | Source: TradingView
The daily chart shows that the RR stock price has done well this year. It crossed the important resistance level of 1,510p this week. Moving above that level is important as it helps to invalidate the double-top pattern.
The surge, which was in line with our prediction, has pushed it much higher than all moving averages. At the same time, the Average Directional Index (ADX) has jumped to 20, a sign that the momentum is accelerating.
Therefore, the most likely scenario is where the stock continues rising, with the next key target being at 1,600p.
A move above that level will point to a surge, potentially to the psychological level of 2,000p.
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