Rolls-Royce (LSE:RR) shares jumped on Thursday. And, as Rolls is one of my largest holdings, I was chuffed!
But I see the solid earnings data as just a part of a broader recovery for this engineering giant. There’s certainly still value here.
So let’s take a look at why I think investors should be diving into Rolls-Royce stock.
Beating expectations
I’d been hypothesising for some months that Rolls’ recovery was further down the line than the share price reflected. The big challenge has been around civil aviation — a segment that accounts for around 40% of revenue.
On Thursday, the firm posted a statutory operating profit of £837m in 2022, considerably up on £513m a year earlier. Meanwhile, revenue grew to £13.5bn from £11.2bn.
The recovery in civil aviation was a major part of this. The FTSE 100 firm gets paid when engines are flying and require servicing — the pandemic nearly broke the business.
However, for 2022, Rolls said that large engine flying hours in civil aerospace grew by 35% year on year. The firm has previously suggested that flying hours were around 65% of 2019 levels towards the end of 2022.
We already knew that the business’s other segments, power systems and defence, were performing well. And the 2022 earnings report confirmed this, with an impress growth in orders for power systems, up 29% to £4.3bn.
All three business units had positive cash flow.
Why it’s not too late
In its report, Rolls said it expected underlying earnings of £800m-£1bn this fiscal year. That’s clearly positive when we consider where the firm was just two years ago.
Rolls didn’t offer too much detail on its forecast for 2023 and 2024, but said it was going to set new financial targets in H2 as it starts a strategic review of the business.
Looking forward without much guidance from the company itself, investors will naturally be wary of the group’s debt burden. Servicing this will impact profitability for years to come.
But the fundamental data here is strong, and the business could be set to surpass 2019 revenue generation (£15.4bn) this year for the first time since the pandemic.
Civil aviation will be key to this. “In 2023, we assume large engine flying hours at 80-90% of 2019’s level and 1,200-1,300 total shop visits”, the company said. China’s reopening was noted as a considerable boost for flying hours contracts, as wide-body jets with Rolls engines are frequently used on domestic flights in the country.
Broadly speaking, we can see that Rolls — which is a smaller business due to Covid era sales — is on the path to recovery. We’re not going to see the share price hit the heights of 2019 immediately — the stock is down a phenomenal 62% over five years (down 8% over one year).
But it’s clear that the way forward is less fraught with risk. The group is profitable and all business units are growing.
So would I buy more stock at 130p? Absolutely. I’ll dive in for a long-term recovery story and buy more when I have the capital available.
