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The Surprising Buy Case for Rolls-Royce Holdings plc

Today I am looking at how surging marine engineering operations are set to drive earnings at Rolls-Royce Holdings (LSE: RR) (NASDAQOTH: RYCEY.US) in coming years.

Mega Marine growth ready to deliver

When you first think of Rolls-Royce, the sound of screaming Spitfire engines piercing the skies, or opulent, leather-lined limousines cruising the streets may immediately spring to mind. Although the company spun off its auto division back in the 1970s, its engineering pedigree on the roads and in the air still dominates Rolls-Royce’s image.

The firm’s reputation as not just a jack, but indeed a master, of all trades across many engineering markets is, of course, no secret. But the earnings-busting potential of these other markets is sometimes overlooked, particularly the company’s accelerating activity in the marine and energy engineering sectors.

Indeed, the world’s insatiable appetite for energy is pushing demand for oil and natural gas carriers — not to mention fossil fuel exploration vessels — higher once again, now that the global economy has seemingly turned the corner following the 2008/2009 financial crash.

The London-based group’s Marine division — responsible for around 17% of group turnover — reported a 10% improvement in the order book to £4.33bn during January-June 2013, while underlying revenues leapt 16% to £1.24bn. The company also opened another service centre during the period, this time in Guangzhou, southern China, taking the number of facilities dotted around the globe to 39.

Meanwhile, signs of improving economic conditions in the US and UK bodes well for future defence purchases in the air and on the sea. The company’s status as a major supplier to Western armed forces is almost unrivalled, illustrated by September’s contract win to build the gas turbine system for the Royal Navy’s future Type 26 global combat fleet.

Elsewhere, news that Rolls-Royce had been in talks to purchase Finland’s Wärtsilä — a leader in power generation market for the marine and energy markets — underline the company’s plans to turbocharge growth at its Marine division. Details as to why talks to buy the Scandinavian entity ended a few days ago were not disclosed, but I fully expect Rolls-Royce to ramp-up M&A  activity in these high-growth areas sooner rather than later.

Indeed, Rolls-Royce chief executive John Rishton commented during the summer that the company is targeting Northern Europe to help it continue its odyssey in the marine engineering sector, The Wall Street Journal reported.

Scandinavian businesses, engines and offshore oil and gas activities” are important, the firm’s head noted, adding that the company is seeing significant opportunity for growth on the way.” Through a combination of steady organic expansion and acquisition activity, I expect Rolls-Royce’s Marine division to deliver excellent earnings growth well into the future.

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> Royston does not own shares in any of the companies mentioned in this article.