3 Factors That Make Rolls-Royce Holdings plc A Soaring Stock Pick

Royston Wild looks at why Rolls-Royce Holdings plc (LON: RR) is a terrific investment choice.

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Today I am looking at why I believe Rolls-Royce Holdings (LSE: RR) (NASDAQOTH: RYCEY.US) is a great stock option for intelligent investors.

Sales outlook underlines solid growth prospects

Recent headlines about Rolls-Royce have unfortunately — at least for the firm itself — concerned the ongoing investigation over bribery allegations in Asia. Of course, the  possible implications of the case could have significant ramifications for the firm, and shares have dived by almost a fifth since Serious Fraud Office agents arrested two men earlier this month.

But in my opinion, this issue is not core to the company’s compelling investment case. Rolls-Royce builds industry-leading products across a multitude of engineering sectors, making it a top-tier equipment builder for the world’s largest original equipment manufacturers (OEMs).

This prowess is reflected in surging sales volumes, and Rolls-Royce saw underlying revenues a mammoth 27% higher during 2013 to £15.5bn. Meanwhile while an order book of £71.6bn — up 19% from the previous year — provides fantastic earnings visibility well into the future.

Excellent civil aerospace exposure

In particular, Rolls-Royce’s aircraft-building expertise places it in pole position to gain on accelerating demand for civilian aircraft, and the business reported a 22% order book improvement last year to £18.9bn.

The company can thank its Trent engine in helping to deliver sustained growth in this division, while its Totalcare service package is also driving orders from the world’s largest airlines — combined, Trent and aftermarket orders account for almost three quarters of the Civil Aerospace book. Rolls-Royce has opened new facilities across the globe to fulfil rising demand in these areas, moves which should drive sales still higher.

A terrific growth performer

Broadly speaking, Rolls-Royce has a terrific reputation of delivering solid — and largely dependable — annual earnings expansion. Although earnings dipped a meagre 2% in 2010, the engineer still boasts a weighty compound annual growth rate of 13.4% during the past five years.

The rate of expansion has slowed in recent years, however, as lower government defence budgets have crimped performance. Rolls-Royce is expected to punch a 5% rise this year before earnings accelerate again, with a 9% increase pencilled in for 2015, helped by recovering Western economies and emerging market demand for military hardware rising.

The aforementioned share price weakness makes Rolls-Royce a blue-chip bargain, in my opinion. Boasting P/E ratings of 14.2 and 13.7 for 2014 and 2015 respectively, these projections compare favourably with a forward average of 14.7 for the complete aerospace and defence sector, of which many constituents boast neither the hi-tech expertise or earnings reliability of ‘Double R.’

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Royston does not own shares in Rolls-Royce Holdings.

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