The question that investors are wrestling with right now about Rolls-Royce is not whether the Business is good — it clearly is — but whether the share price has already priced in every piece of good news the company is likely to deliver for the next several years.
The stock reached an intraday all-time high of 1,420p on February 28, the day the Iran conflict began, and has since pulled back to around 1,216p — a fall of more than 10% in roughly two weeks.
For context, Rolls-Royce shares have risen more than 960% over five years and 58% in the last twelve months alone, a trajectory driven almost entirely by CEO Tufan Erginbilgiç’s aggressive profit-improvement programme.
Full-year 2025 results published on February 26 showed underlying profit jumping 28.8% to £3.46 billion, beating the upgraded targets Erginbilgiç had set in mid-2025, and the company announced a £2.5 billion share buyback for 2026 and between £7 billion and £9 billion across 2026 to 2028.
The defence division, which is benefiting directly from the Iran conflict, generated £4.77 billion in revenue, up 8% from the prior year, with its operating margin rising from 14.2% to 14.4%.
Power Systems, another segment with limited exposure to Middle Eastern airspace disruption, grew revenue 19% to over £4.9 billion, driven largely by data centre demand for backup power generation.
The civil aviation segment is the problem. Rolls-Royce’s most visible revenue driver is not engine sales but the long-term service agreements tied to flight hours — and if Middle Eastern airspace remains significantly disrupted, those contracts generate less income.
Neil Wilson of Saxo Markets identified “global air travel demand worries” as the primary factor weighing on the shares, with the airspace over Azerbaijan already closed and Gulf hubs severely disrupted since the conflict escalated.
The P/E ratio, which had reached a dizzying 65 at peak, has come down to around 43 after the pullback — still expensive by most conventional measures but representing a measurable improvement in the entry price for prospective buyers.
Erginbilgiç has set 2026 operating profit guidance of £4.0 billion to £4.2 billion and free cash flow of £3.6 billion to £3.8 billion, alongside a warning that supply chain issues could generate £150 million to £200 million of additional cash costs, which adds uncertainty to the near-term delivery.
On the defence and next-generation aircraft front, Rolls-Royce scored a meaningful political victory when major German labour unions and aerospace groups called for Germany to abandon the Franco-German fighter jet project and join the UK-Italy-Japan collaboration that uses Rolls-Royce engines instead.
The long-term picture — civil aviation growth, European rearmament, small modular reactors, and data centre power — remains compelling enough that most analysts see the pullback as a buying opportunity rather than a structural warning, though the timing of any re-entry depends entirely on how long the Middle East conflict continues to keep civil airspace closed.