Rolls-Royce|Profit Fell 60%, Shares Hit Near-Record

The Headline That Undersells Itself

Rolls-Royce shares jumped as much as six percent on Thursday, touching one thousand four hundred sixty-three pence, close to their all-time high of one thousand five hundred thirty-two point six pence. On the surface, the numbers look contradictory. Pretax profit for the first half of twenty twenty-six slumped sixty percent, falling to one point nine three billion pounds from four point eight four billion pounds a year earlier. A headline reader could easily conclude Rolls-Royce had a bad half. The market did the opposite, sending the stock to the top of the FTSE 100.

The gap resolves once the comparison base is understood. The prior-year period included a six hundred seventy-nine million pound gain from a disposal, a one-off that inflated last year's pretax figure. Strip that out, and operating profit actually rose seventeen percent to two point four two billion pounds. The more telling number is underlying operating profit, which climbed forty-six percent to two point five three billion pounds, comfortably ahead of the one point eight four billion pound consensus that RBC Capital Markets had pencilled in.

Revenue told the same story from another angle. It rose twenty-one percent to eleven point four five billion pounds, well past the ten point one seven billion pound consensus analysts had expected. So the sixty percent pretax decline was never a signal of weakening performance. It was an accounting artefact of a favourable prior-year comparison. The underlying business, on every operating measure, strengthened.

Why the Guidance Raise Changes the Calculus

What moved the share price was not the historical comparison but the forward one. Rolls-Royce raised its full-year underlying operating profit guidance to a range of four point seven to four point nine billion pounds, up from a prior range of four billion to four point two billion pounds. Free cash flow guidance rose too, to a range of three point eight to four billion pounds, from three point six to three point eight billion pounds previously. Both new ranges sit above what the market had already priced in.

The improvement was not confined to one division. Civil aerospace delivered an underlying operating margin of twenty-five point three percent, up from twenty-four point nine percent, driven by stronger aftermarket performance and improved long-term service agreement terms. Defence's margin jumped even more sharply, to twenty-one percent from fifteen point four percent a year earlier. Power Systems improved to twenty point three percent from fifteen point three percent. Chief executive Tufan Erginbilgic called it a strong first-half performance across all three businesses, and the margin data across every division supports that framing rather than contradicting it.

Management backed the guidance with cash, not just words. The interim dividend rose to six pence per share from four point five pence, and the company confirmed it has completed one point four billion pounds of a planned two point five billion pound share buyback for this year, part of a multi-year programme totalling seven to nine billion pounds through twenty twenty-eight. A dividend increase alongside a guidance raise reframes the sixty percent pretax headline as noise rather than signal for anyone assessing whether the business itself is improving.

The Driver Behind the Driver: Defence and Data Centres

The Guardian's reporting on the results points to two structural tailwinds behind the margin gains, rather than a one-quarter fluke. Rolls-Royce has benefited from the jump in defence spending since Russia's full-scale invasion of Ukraine in twenty twenty-two, and its power generation unit has seen increased demand from data centres used by AI companies. Erginbilgic said the company was still calibrating how large the gas-turbine market for data centres could become in the US, but that it had already secured future orders.

On defence specifically, Erginbilgiç said he felt considerably more confident about order visibility after the UK published its long-delayed defence investment plan, which confirmed Tempest fighter jet spending through twenty thirty and added five billion pounds for autonomous weapons. The company is also developing the engine for the Brontanax combat drone that BAE Systems revealed the previous week, positioning Rolls-Royce inside a newly emerging category of uncrewed military aircraft rather than only its legacy engine business.

A commentary carried by Invezz argued the market is underpricing the data-centre and backup-power growth specifically, noting the stock had broken above one thousand four hundred twenty pence and was holding above its fifty and one-hundred-day moving averages. That reading turns the conventional aerospace-recovery narrative on its head: the newer, less-followed power-systems growth story may matter as much to the guidance raise as the more familiar civil-aviation aftermarket recovery that investors have tracked for the past two years.

What the Beat Leaves Unresolved

The results are not without qualification. Rolls-Royce continues to face supply-chain constraints and product-cost inflation, and it anticipates continued supply-chain headwinds through the remainder of twenty twenty-six that will weigh on cash flow and operating profit. Civil aerospace original-equipment deliveries fell as the company aligned output with airframe production schedules, a reminder that revenue growth has not been friction-free.

Valuation views diverge sharply even after the same set of results. One widely followed narrative puts fair value at fourteen pounds twenty-seven pence against a recent close near twelve pounds sixty-one pence, implying the stock is still around twelve percent undervalued. A discounted cash flow model applied to the same numbers reaches the opposite conclusion, estimating fair value closer to nine pounds twenty-one pence and framing the shares as overvalued at current levels. Both models start from the same guidance raise and reach different destinations, because they weight the data-centre growth assumption differently.

Taken together, the evidence supports a narrower reading than either the shock headline or the bullish momentum trade alone. The sixty percent pretax decline was a comparison artefact from a prior-year disposal gain, not a deterioration in the business. The underlying operating profit growth, the across-the-board margin expansion, and the raised guidance and dividend all point the same direction. What remains genuinely open is how much of the current share-price strength already reflects the data-centre growth story analysts flag as underpriced, and how that will be tested if supply-chain cost pressure does not ease as management expects through the rest of this year.