Is Rolls-Royce Holding PLC A Better Buy Than Unilever plc And BAE Systems plc?

Which of these 3 FTSE 100 heavyweights is the best buy? Rolls-Royce Holding PLC (LON: RR), Unilever plc (LON: ULVR) or BAE Systems plc (LON: BA)

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Rolls-Royce (LSE: RR) is in the headlines today after its biggest shareholder, ValueAct, stated that it believes accelerated cost-cutting is the best way forward for the struggling engine and power systems manufacturer. Furthermore, ValueAct is apparently encouraging Rolls-Royce to consider a sale of its non-aircraft divisions that could leave a more streamlined, efficient and profitable business.

As a result of the comments, shares in Rolls-Royce have risen by over 4% today and are one of the top risers in the FTSE 100. However, they are still well down in the last three months, with Rolls-Royce seeing around 20% wiped off its valuation following a profit warning. And things could get worse before they get better for the company, with its bottom line set to fall by 17% in each of the next two years. Clearly, such figures would be likely to prompt a worsening of investor sentiment, so it seems obvious that the company’s new management team will need to take action.

Despite falling by a fifth in the last three months, shares in Rolls-Royce continue to trade on a relatively rich valuation. For example, they have a price to earnings (P/E) ratio of 14.6 and, factoring in next year’s planned fall in earnings, trade on a forward P/E ratio of 17.7. Rolls-Royce’s share price could under-perform the wider index until a clear and coherent strategy is announced and then begins to be delivered.

A great value option

Of course, there are more appealing options in the FTSE 100. And, among industrial stocks, defence company, BAE (LSE: BA), stands out as a great value option. Like Rolls-Royce, it has had a profit warning in recent trading, but has recovered well so that it is expected to post earnings growth of around 6% next year.

Clearly, much of BAE’s recovery is due to a rapidly improving outlook for the defence sector, with an improving global economy meaning that defence budgets across the developed world are coming under less pressure.

However, BAE has also been able to improve its efficiency in recent years in response to weak demand for its products and, despite its upbeat outlook, trades on a P/E ratio of just 12.6. This indicates that there is considerable upside potential on offer.

Superb growth potential

However, an even better option than BAE is Unilever (LSE: ULVR). Certainly, it is a very different business than either BAE or Rolls-Royce, and its main advantage is that it is less dependent upon external factors than its two FTSE 100 peers. In fact, Unilever has a much more reliable earnings outlook, with a high degree of customer loyalty for its products ensuring that, even if the global economy experiences a downturn, sales of Unilever’s goods should remain buoyant.

Unlike BAE, however, Unilever trades on a high P/E ratio of 22.5, so there is less scope for an upward re-rating than its index peer. Unilever, though, has superb growth potential, with its bottom line set to rise by 14% this year and by a further 7% next year. As such, investor sentiment could be positively catalysed and push the company’s share price to higher highs.

And, while BAE is a great stock, if you could only buy one or the other, then Unilever’s defensive attributes make it the preferred choice at the present time.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of BAE Systems and Unilever. The Motley Fool UK owns shares of Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

I’d buy 1,784 shares of this FTSE 100 stock to target £350 of monthly passive income

Muhammad Cheema takes a look at how British American Tobacco shares, with a dividend yield of 10.1%, can generate a…

Read more »

White female supervisor working at an oil rig
Investing Articles

1 ex-FTSE 100 stock that I think will get promoted soon

Jon Smith flags up an energy stock that used to be in the FTSE 100 and currently has strong momentum…

Read more »

Shot of a young Black woman doing some paperwork in a modern office
Investing Articles

With an 8% dividend yield, I think this undervalued FTSE stock is a no-brainer buy

With an impressive yield and good track record of payments, Mark David Hartley is considering adding this promising FTSE share…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

£9,500 in savings? Here’s how I’d try to turn that into £1,809 a month of passive income

Investing a relatively small amount into high-yielding stocks and reinvesting the dividends paid can generate significant passive income over time.

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

Dividend star Legal & General’s share price is still marked down, so should I buy more?

Legal & General’s share price looks very undervalued against its peers. But it pays an 8%+ dividend yield, and has…

Read more »

Investing Articles

Dividend shares: 1 FTSE 100 stock to consider buying for chunky shareholder income

This company’s ‘clean’ dividend record looks attractive to me and I’d consider buying some of the shares to hold long…

Read more »

Investing Articles

3 of my top FTSE 250 stocks to consider buying before April

Buying undervalued UK shares can be a great way to generate long-term wealth. Here, Royston Wild reveals a handful on…

Read more »

Ice cube tray filled with ice cubes and three loose ice cubes against dark wood.
Investing Articles

Just released: our 3 top income-focused stocks to buy before April [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »