Today I am looking at why I believe Rolls-Royce Holdings (LSE: RR) (NASDAQOTH: RYCEY.US) is a great stock option for intelligent investors.
Sales outlook underlines solid growth prospects
Recent headlines about Rolls-Royce have unfortunately — at least for the firm itself — concerned the ongoing investigation over bribery allegations in Asia. Of course, the possible implications of the case could have significant ramifications for the firm, and shares have dived by almost a fifth since Serious Fraud Office agents arrested two men earlier this month.
But in my opinion, this issue is not core to the company’s compelling investment case. Rolls-Royce builds industry-leading products across a multitude of engineering sectors, making it a top-tier equipment builder for the world’s largest original equipment manufacturers (OEMs).
This prowess is reflected in surging sales volumes, and Rolls-Royce saw underlying revenues a mammoth 27% higher during 2013 to £15.5bn. Meanwhile while an order book of £71.6bn — up 19% from the previous year — provides fantastic earnings visibility well into the future.
Excellent civil aerospace exposure
In particular, Rolls-Royce’s aircraft-building expertise places it in pole position to gain on accelerating demand for civilian aircraft, and the business reported a 22% order book improvement last year to £18.9bn.
The company can thank its Trent engine in helping to deliver sustained growth in this division, while its Totalcare service package is also driving orders from the world’s largest airlines — combined, Trent and aftermarket orders account for almost three quarters of the Civil Aerospace book. Rolls-Royce has opened new facilities across the globe to fulfil rising demand in these areas, moves which should drive sales still higher.
A terrific growth performer
Broadly speaking, Rolls-Royce has a terrific reputation of delivering solid — and largely dependable — annual earnings expansion. Although earnings dipped a meagre 2% in 2010, the engineer still boasts a weighty compound annual growth rate of 13.4% during the past five years.
The rate of expansion has slowed in recent years, however, as lower government defence budgets have crimped performance. Rolls-Royce is expected to punch a 5% rise this year before earnings accelerate again, with a 9% increase pencilled in for 2015, helped by recovering Western economies and emerging market demand for military hardware rising.
The aforementioned share price weakness makes Rolls-Royce a blue-chip bargain, in my opinion. Boasting P/E ratings of 14.2 and 13.7 for 2014 and 2015 respectively, these projections compare favourably with a forward average of 14.7 for the complete aerospace and defence sector, of which many constituents boast neither the hi-tech expertise or earnings reliability of ‘Double R.’
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> Royston does not own shares in Rolls-Royce Holdings.