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Why Rolls-Royce Holding plc is a growth bargain I’d buy and hold for 25 years

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While the FTSE 100 may have risen to an all-time high in 2017, there are still a number of bargains on offer. Not all stocks have risen above and beyond their intrinsic values so there could still be a number of companies which offer wide margins of safety.

One such company could be Rolls-Royce (LSE: RR). It has faced a challenging period, where many of its end markets have been under pressure as military spending has been reduced. However, with an era of austerity apparently now drawing to a close and the company offering a low valuation as well as a new strategy, now could be the perfect time to buy it.

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Improving outlook

After two years of declining profitability, which included a £4.6bn pre-tax loss last time, the company now appears to have a bright future. In the current period is it expected to record a return to profitability, with its bottom line due to rise by 10% in the next calendar year. This suggests that its new strategy under a refreshed management team could be having a positive impact on the company’s financial performance. Efficiency gains through various cost-cutting measures look set to boost its bottom line.

As well as this, higher military spending seems likely in future years. The Trump administration has repeatedly called for higher spending on defence, and this looks set to become a reality as cutbacks in a range of government departments across the developed world becomes less attractive to voters. This could catalyse Rolls-Royce’s financial performance beyond next year and mean that it enjoys a tailwind in future years.

Valuation

Despite its upbeat earnings growth outlook, the company trades on a relatively low valuation. Rolls-Royce has a price-to-earnings growth (PEG) ratio of 2. This suggests there could be more upside potential ahead. As its strategy is implemented and its markets begin to improve, it could reasonably be expected that a higher earnings growth rate will be achieved. As such, now could be the right time to buy it for the long run.

Also offering good value for money at the present time is integrated marketing services provider Communisis (LSE: CMS). The company released a positive trading update on Monday which showed that it is performing in line with previous expectations. Furthermore, it has appointed a new CFO who begins work today. This could help the company to deliver continued earnings growth in the long run.

Looking ahead, Communisis is expected to deliver a rise in its bottom line of 4% in the current year, followed by additional growth of 3% next year. It trades on a price-to-earnings (P/E) ratio of just 9.4, which suggests it has a wide margin of safety. This could mean that it is able to deliver further share price growth even after its 68% rise over the last year. With what seems to be a sound strategy and a wide margin of safety, it could be a stock worth buying for the long run.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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