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Rolls Royce shares hum with delight, but I think they can rise a lot higher

The last few years have not been a good period for Rolls Royce Group (LSE:RR). Shares have fallen by a third over the last five years and have lost around 7% this year. All the more ironic then, that they should rise while the broader stock market tumbles after having enjoyed such a good few years.

The company has released its latest results, and the markets were pleased with what they revealed and shares surged. Like most companies at the moment, the company acknowledged a likely negative impact on sales this year from the coronavirus, but said that “long-term growth trends remain intact.”

Rolls Royce manufacturers aero engines for large commercial aircraft and military use. It also produces power systems and a range of other aero-engine products and services and maritime systems in the naval sector.

Its performance in recent years was hit hard with issues concerning its Trent 1000 engine, but the company expects costs related to this to fall sharply this year.

What I like

The latest results revealed a lot to be positive about.

For one thing, its relatively new CEO, Warren East, seems to have re-galvanised the company, reducing costs, while successfully developing new innovative products. East said that there has already been a “sustainable cultural and performance shift.” He also talked about the company “innovating to become a disruptor in new areas.” I like the sound of that, and believe it’s the right strategy at a time when technology is changing fast.

The latest results revealed a £521m improvement in net cash — that works out at around 62% up on last year. Sure the company made an operating loss — but this was expected, and entirely explained by an exceptional programme charge related to the Trent 1000 issues. Underlying operating profit stood at £808m, 25% up on last year.

The company is also targeting free cash flow of £1 a share in the midterm. This augurs well for future dividends.

That’s not what drew my attention, however.

The company claims that its Trent XWB is the most efficient civil large engine in service today. The company is following this up with its next generation product called UltraFan. With the pressures of climate change forcing the aerospace industry to focus on ways to limit use of fossil fuels, this product is enormously important.

East also talked about the company’s drive for alternative sustainable fuels and its commitment to develop new low emission technologies.

The company’s expertise is outstanding. This means that Rolls Royce can excel as it focuses on efficient use of fuels and sustainable energy.

East said that the company is “well placed to realise our long-term aspiration to be the world’s leading industrial technology company.” That’s a bold ambition. If it can be realised, profits and shares should rise significantly.

I think that Rolls Royce is well placed to benefit from the significant changes afoot.

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Michael Baxter has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.