UK investors continue to pile into Rolls-Royce shares. Last week, Rolls-Royce was one of the most purchased stocks on a number of major investment platforms.
While its share price could potentially rise from here as the travel industry rebounds, I won’t be buying the stock. The reason? The FTSE 100 company has a very poor record when it comes to generating long-term shareholder wealth. Over the years, it’s disappointed investors on many occasions.
There are plenty of other UK shares I’d buy today however. Here’s a look at two.
This FTSE 100 company is flying under the radar
One FTSE 100 stock I like the look of right now is Hikma Pharmaceuticals (LSE: HIK). It’s an under-the-radar healthcare company that manufactures generic, branded, and injectable medicines.
Hikma has a much stronger track record than Rolls-Royce when it comes to generating long-term growth. While Rolls-Royce’s revenue went backwards between 2015 and 2020, Hikma’s top line surged 63%.
There’s more to Hikma than just revenue growth however. This company’s quite profitable and has a good dividend growth track record. Last year, it increased its payout from $0.44 per share to $0.50 per share (Rolls-Royce paid no dividend).
Of course, Hikma isn’t perfect. Like every company, it’s had setbacks in the past. In 2017, for example, it generated a loss on the back of challenging market conditions and some issues with the US Food and Drug Administration (FDA). It could experience similar issues in the future.
Overall however, I see a lot to like about Hikma. At its current valuation (forward-looking P/E of 19.6), I think the stock’s worth buying.
A very profitable company
Another UK share I’d buy over Rolls-Royce is Rightmove (LSE: RMV). It operates the UK’s largest property website.
Rightmove also has a very good track record when it comes to generating long-term growth. Between 2015 and 2019, revenue climbed from £192.1m to £289.3m. Revenue did take a hit last year during the pandemic (£205.7m), but it’s expected to bounce back this year. Currently, analysts forecast revenue of £295.2m for 2021.
One thing that stands out about Rightmove is that it’s extremely profitable. Over the last three years, return on capital employed (ROCE) has averaged 427% (versus -7% for Rolls-Royce). Companies that generate a very high ROCE tend to be good long-term investments.
As Warren Buffett’s business partner Charlie Munger says: “If the business earns six percent on capital over forty years and you hold it for that forty years, you’re not going to make much different than a six percent return. Conversely, if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you’ll end up with one hell of a result.”
A risk to consider is rising competition. Companies such as Zoopla and OnTheMarket are trying to grab market share. However, they’ve a long way to go to topple Rightmove. Last year, its market share of the top four property portals was 87.8%.
Rightmove shares aren’t cheap. Currently, the stock trades on a forward-looking P/E ratio of about 32. I think RMV is worth the premium though. At its current valuation, I see it as a ‘buy’.
