Although 2014 has not seen Rolls Royce (LSE: RR) (NASDAQOTH: RYCEY.US) make the best of starts — its shares are down 7.7% while the FTSE 100 is down only 2.6% — it has enjoyed far superior performance over the last few years.
Indeed, Rolls Royce has outperformed the FTSE 100 over one year (up 20% versus the FTSE 100’s 5%) and over five years (up 250% versus 53% for the FTSE 100).
One reason behind this outperformance could be the consistency of earnings growth that has been delivered by Rolls Royce. For instance, over the last 5 years its growth in earnings per share (EPS) has averaged over 12% per annum, with positive growth being delivered in four of those five years. The only negative year was 2010, when EPS fell by 2%.
Therefore, it seems as though investors view Rolls Royce as something of a consistent and reliable growth stock that tends to deliver.
Indeed, the next two years also appear to offer above-average growth rates. EPS is set to grow by 8% in each of the next two years and, although this is less than the rate at which it has been growing over the last 5 years (as mentioned), it is still above the average growth rate that the wider market is predicted to achieve (between 4-7%) over the next two years.
Furthermore, the fall in share price at the start of 2014 could give longer term investors (ie, those with an eye on building a retirement fund) an opportunity to buy Rolls Royce shares when they represent relatively good value for money.
For instance, Rolls Royce currently trades on a forward price to earnings (P/E) ratio of 16.4. When compared to the FTSE 100’s P/E of 13.5, this may seem high. However, when it is compared to the wider ‘Industrials’ group (to which Rolls Royce belongs), it seems much better value, since the ‘Industrials’ group currently trades on a P/E ratio of 24.
This puts Rolls Royce on a discount of 32% versus its industry group. When this is combined with the above-average growth rate forecasts and historic consistency of earnings growth, it means that Rolls Royce could help you retire early.
Peter does not own shares in Rolls Royce.