Rolls-Royce Shares Maintain Momentum on Strong Fundamentals

Rolls-Royce is concluding a remarkable period of stock market performance. The company's operational recovery is gaining traction across both its aerospace division and its ventures into new energy technologies, while a substantial share repurchase initiative is underway. This resurgence prompts a critical examination of its sustainability following years of extensive corporate restructuring.

A pivotal element in the current market narrative is the company's approach to capital allocation. Rolls-Royce has initiated and is currently executing a £1 billion share buyback program.

This strategic move conveys two significant messages to the market:

1. Robust Financial Health: Management is signaling that the balance sheet has been sufficiently repaired after the challenging pandemic years. The ability to return excess capital to shareholders, rather than focusing solely on further debt reduction, indicates strengthened financial foundations.
2. Valuation Outlook: Despite the significant appreciation in the share price, the company's leadership evidently perceives further upside potential. The ongoing buyback suggests the board continues to view the equity as attractively valued relative to anticipated future earnings levels.

This action provides underlying support for the share price and reinforces the perception of a company transitioning from a recovery phase into a period focused on growth and shareholder returns.

Operational Recovery Driven by Core Metrics

The recent equity performance is not merely sentiment-driven but is underpinned by tangible, measurable progress within Rolls-Royce's core business operations.

Should investors sell immediately? Or is it worth buying Rolls-Royce?

• Civil Aerospace Rebounds: The key performance indicator for the large engine business—engine flying hours for wide-body aircraft—has not just recovered to pre-crisis levels but has surpassed them. Currently at approximately 109% of 2019's figures, flying hours are now meaningfully above pre-pandemic activity. For Rolls-Royce, this translates into increased and more predictable maintenance revenue, which traditionally forms a substantial portion of the company's profit base.
• Advancement in Small Modular Reactors (SMR): Concurrently, momentum is building within the energy division. The company has secured a significant contract award in the small modular reactor sector. This win is viewed as a technological endorsement within the competitive nuclear industry and de-risks the future development trajectory of the Power Systems division by attaching concrete projects and anticipated cash flows to its strategic roadmap.

The combination of resurgent aviation activity and substantive initial successes in the SMR business fortifies the fundamental investment thesis for the conglomerate.

Technical Perspective and Market Position

From a technical analysis standpoint, the shares are situated within a well-defined upward trend, even if short-term consolidation is a natural expectation following a steep rally. The Relative Strength Index (RSI) sits at a neutral level around 41, indicating the stock is not in overbought territory. Furthermore, the share price continues to trade notably above its 200-day moving average, confirming the broader bullish trend.

While the FTSE 100 index edged up a modest 0.28% to 9,730 points on Friday, Rolls-Royce shares paused after a dynamic year. The weekly chart shows stability, though the stock has ceded some ground on a monthly view. The longer-term performance, however, remains impressive: share price gains stand at roughly 76% year-to-date and just over 79% across a twelve-month period.

Notably, the stock has decoupled from the broader market trend. As the main index advances in incremental steps, Rolls-Royce has established its own distinct upward trajectory, driven primarily by improved operational execution and a consistent transformation strategy under CEO Tufan Erginbilgiç.

Foundation for the Next Phase

The critical question for the coming weeks is whether Rolls-Royce can consolidate at these elevated price levels and transition into a stable consolidation or continuation pattern. The groundwork for this appears favorable. Flying hours above pre-crisis levels, a growing order book in the SMR domain, and an active share repurchase program collectively establish a solid foundation for the next stage of the company's turnaround.