Investing in aerospace engineering companies like Rolls-Royce (LSE: RR) is not exactly in fashion these days, but you could be making a mistake if you overlook the sector.
Over the past three years, we’ve seen compounded growth in earnings per share (EPS) of 70% from the maker of the engines that power so many of the world’s aeroplanes. And although that rate of growth is sure to slow, the outlook is still pretty rosy.
For the year to December 2014, the consensus of forecasts suggests only a 2% rise in EPS, but there’s a further 8% currently indicated for 2015 — and those sticking their necks out far enough are predicting more years of growth after that.
But for this year at least, the outlook is for a pause in growth, after an update from the company on 1 May told us it “continues to expect revenue and profit to be flat for the full year, with free cash flow similar to 2013“.
Those 2014 prospects have meant Rolls-Royce shares have fallen 10% over the past 12 months to 1,020p, dropping 30p on the day of the interim announcement alone, while the FTSE 100 has managed a 5% uptick — although over five years Rolls-Royce has stormed to a three-bagger while the FTSE has struggled to beat 50%.
The recent decline came after the company’s full-year results released in February disappointed the market and led to a one-day slump of 13.6% — but was that overdone?
Well, a full 50% of 18 analysts have Rolls-Royce on a Strong Buy rating at the moment, with only two of them suggesting we should sell, and that’s one of the most bullish balances of recommendations out there right now.
And the apparent shock from those results hasn’t really had much effect on their opinions — from a pre-results consensus for EPS of 72.2p this year, we’ve seen only a modest downgrade to today’s figure of 67.3p. A year ago we had 71.6p on the cards, so over the year the consensus has actually been pretty consistent.
The expected couple of years of relatively modest growth have, however, knocked 2015 forecasts back a little — from 78.3p in EPS three months ago to 72.9p today, but that’s still nowhere near the catastrophe suggested by the share price plunge.
Not much cash
The only downside for me is Rolls-Royce’s low dividends. With a very modest yield of 2.2% expected for this year rising to 2.4% next, it really isn’t one for income seekers — certainly not in these days when there are much better dividend prospects out there.
But if you’re looking for a good old-fashioned engineer with decades of solid business ahead of it, Rolls-Royce has to be worth a look on a 2015 P/E of just 14.
Alan does not own any shares in Rolls-Royce.