One dividend growth stock I’d buy ahead of FTSE 100 member Rolls-Royce

Does FTSE 100 (INDEXFTSE:UKX) turnaround Rolls-Royce Holding plc (LON:RR) deserve a buy rating?

| 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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

Engineering firm Weir Group (LSE: WEIR) was 5% higher at pixel time, after issuing a solid trading statement and announcing a $1,285m deal to acquire US mining equipment firm ESCO Corporation.

Weir specialises in equipment for the oil, gas and mining industries. It’s already made a strong recovery from the recent downturns in both sectors. Today’s news means that the firm will increase its focus on the mining sector, which is already its largest customer.

Let’s take a look at trading first and then see how the ESCO acquisition might fit into the picture.

Sales up by 22%

Orders rose by 22% during the first quarter, compared to the same period last year. The mining business performed well, with orders up by 13%. However, the oil and gas division rocketed ahead of this with a 50% surge in orders for pumping equipment, mostly from US shale drillers.

The company was already expected to do well this year and at this point, full-year forecasts have been left unchanged. However, I suspect that if this strong momentum continues through the first half, full-year forecasts could be notched higher.

What about the acquisition?

ESCO Corporation is a market leader in “surface mining ground engaging tools”. The company’s products include the giant buckets and shovels used by miners to dig huge holes in the ground.

The $1,285m purchase price equates to 12.6 times ESCO’s 2018 forecast earnings before interest, tax, depreciation and amortisation (EBITDA). That seems fully priced to me, but if the mining market continues to expand for the next few years, the deal could prove to be quite reasonably priced.

It’s quite a big acquisition for Weir, and the firm intends to use a mix of shares, cash and debt to fund the transaction. The group’s slowest-growing division, Flow Control, is also being placed up for sale.

A lot of new shares will be issued to help fund this deal. Full-year earnings forecasts are likely to change significantly as the new shares and ESCO’s earnings are factored into analysts’ projections.

However, my view is that Weir probably remains good value on a three-to-five-year timescale.

Flying high already

I’m less convinced by the investment case at FTSE 100 engineer Rolls-Royce Holding (LSE: RR). The group recently announced the sale of its L’Orange fuel injection business for £610m, which will reduce debt levels and make cash available for other acquisitions.

However, the latest news from the company suggests that challenges remain in its jet engine business. Around 380 of its Trent 1000 engines require additional inspections due to potential problems with the “Package C compressor“. This will have a cash impact.

The additional cash cost hasn’t been specified, but Rolls has admitted that it plans to delay certain non-essential spending in order to avoid cutting its full-year guidance.

My view

Chief executive Warren East seems to be doing a good job of transforming this complex business. I’ve no doubt Rolls-Royce will make a full recovery. My concern is that the shares already look quite fully priced, trading on 27 times 2019 forecast earnings.

It’s not clear to me if the company’s profits can return to the levels seen in the past. If they do, the shares could be good value at present. I’m not entirely convinced, so I’m happy to stay on the sidelines and risk missing out.

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.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Weir. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »