Rolls-Royce is entering a new chapter of its turnaround story, and market optimism is gathering pace. A leading equity analyst has recently increased long-term forecasts for the engineering giant, highlighting the company’s improving fundamentals and potential for significant shareholder returns.

Stronger Free Cash Flow Projections

The latest projections suggest that by 2028, Rolls-Royce could generate around £5.4 billion in free cash flow, exceeding the company’s own guidance of £4.2–£4.5 billion. This upgraded outlook is largely driven by expectations of stronger pricing power and higher profit margins, particularly in the Civil Aerospace and Power Systems divisions. These segments are seen as the key beneficiaries of operational improvements and strategic changes made over the past few years.

Why Pricing and Margins Matter

Pricing discipline is becoming an increasingly important driver of profitability for Rolls-Royce. In civil aerospace, a recovering global travel market and growing demand for efficient, long-haul engines are providing opportunities to command better terms. Meanwhile, in power systems, the company’s continued shift towards higher-value, integrated solutions is helping to push margins above previous expectations.

If these trends persist, the benefits will flow directly to free cash flow — a metric closely watched by investors as it signals a company’s ability to pay down debt, reinvest in growth, and return capital to shareholders.

Valuation and Comparisons

With the new forecasts, Rolls-Royce is valued on a similar free cash flow yield to its European peer Safran for 2028. This is significant because, historically, Rolls has traded at a discount due to perceived execution risks. Closing that gap could unlock further upside in the share price.

The analyst also points out that as Rolls-Royce strengthens its operations, it is becoming increasingly comparable to General Electric (GE) in terms of structure and market position — a shift that could justify a higher valuation over time.

Scenario Analysis: From Caution to Optimism

Three potential 2028 scenarios are worth noting:

• Bull case – If free cash flow reaches £5.8 billion, a share price near £20 could be reasonable.
• Base case – At £5.4 billion, the current fair value sits around £13.75.
• Bear case – If results only match the low end of guidance (£4.2 billion), fair value would be closer to £9.

This range underlines both the opportunity and the risks, but the current trajectory points towards the upper end.

Rolls-Royce’s operational turnaround is gaining credibility, with higher pricing power and stronger margins playing a central role. While execution remains key, the company is now in a position to potentially match — and perhaps exceed — the performance of its most respected global peers. For long-term investors, the improving outlook makes a strong case for optimism.