Should I Buy Rolls-Royce Holding PLC?

Last time I checked out Rolls-Royce Holdings (LSE: RR) (NASDAQOTH: RYCEY.US), in March last year, I said it offered investors Rolls-Royce performance at a Rolls-Royce price. The share price has been purring nicely since then, rising 43% in the past 12 months. Over five years, it is up an astonishing 330%. Will the smooth ride continue?

First, I must declare a personal issue. I have an aversion to buying ‘expensive stocks’. Rolls-Royce currently trades at nearly 22 times earnings: my preferred buying territory is closer to half that. I didn’t buy Rolls-Royce last year because I considered it a little pricey at 18.7 times earnings. Today, that looks a bargain. Sometimes, clearly, it is worth paying a premium price for a premium performer. So would I pay 22 times earnings today?

Law and order books

Rolls-Royce has engineered impressive earnings per share (EPS) growth of 25%, 22% and 12% respectively over the past three calendar years. The road ahead may be a little bumpier, with growth forecasts slipping to 9% a year in 2014 and 2015. But the company has been winning new business, securing multiple contracts worth more than $600 million for various US government departments in the third quarter. Its civil aerospace division will be boosted by Japan Airlines’ order for 31 Airbus A350 XWB aircraft, which are powered by the Rolls-Royce’s Trent XWB engines. Civil aerospace is a cyclical sector, but that may tempt you, if you’re bullish about the global economy. A fat £70 billion order book looks even more tempting.

What a shame Rolls-Royce has been tarnished by embarrassing bribery and corruption scandals involving intermediaries in Indonesia and China. The Serious Fraud Office announced a formal criminal investigation just before Christmas, but the impact on the share price was minimal. The allegations date back to the 1990s and 1980s, and the case is likely to drag on for years, so I don’t think it really dents the investment case. Rolls-Royce has beefed up its compliance and ethics systems in recent years, and that may help limit the reputational damage.

Smooth road

The company has exciting prospects, especially with 3-D printing, which should allow it to make lighter, faster aero-engine parts, slashing lead times. The technology is progressing rapidly and the potential is huge. Some of you might be disappointed by the yield on this stock, which is currently just 1.5%, but management policy is progressive, with a 13% hike in the half-year payment to 8.6p. Covered three times, there is scope for growth.

Yes, Rolls-Royce is expensive, but what do you expect? Even I have to admit that it can be worth paying a premium price for such a premium performer.

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> Harvey doesn't own shares in any company mentioned in this article.