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What You Were Buying Last Week: Rolls-Royce Holding PLC

rollsroyceOne of Warren Buffett’s famous investing sayings is “be fearful when others are greedy and greedy only when others are fearful” – or, in other words, sell when others are buying and buy when they’re selling.

But we might expect Foolish investors to know that, and looking at what Fools have been buying recently might well provide us with some ideas for good investments.

So, in this series of articles, we’re going to look at what customers of The Motley Fool ShareDealing Service have been buying in the past week or so, and what might have made them decide to do so.

High-flyer brought low

Until the start of this year Rolls-Royce Holdings (LSE: RR) was a high-flying, blue-chip investment — a world-class company, operating in the lucrative aerospace and defence markets. Hitting a high of almost 1,300p in early January this year, its share price had increased by a stellar 290% in the five year since the start of 2009.

But on 13 February there came a final results statement for 2013, in which Rolls-Royce forecast flat revenue and profit for the year ahead, and its share price plunged almost 14% in a day. After recovering slightly, the share price then drifted slowly down another 9% over the next 8 months.

Then the company issued  ‘guidance warning’ on 17 October, in which it slashed its revenue forecasts for 2014 and 2015,  saying that ““in the last few months economic conditions have deteriorated and Russian trade sanctions have tightened, leading a number of customers to delay or cancel orders”, and its share price plummeted another 12% in a day.

Now, after bouncing and falling back again, Roll-Royce’s share price now stands nearly 40% down on the year so far.

Well placed for take off

But maybe  the dramatic slump in share price presents an opportunity to buy into a company that’s still world-class and that still has market-leading products and services. Although it’s obviously being badly buffeted by the turbulent world economy at the moment, it remains very well placed to return to growth when the aerospace market strengthens again.  

Perhaps that’s what persuaded enough people to propel Rolls-Royce into the number three slot in our latest “Top Ten Buys” list*.

Indeed, in its guidance statement of 17 October, Rolls-Royce said:

In the medium term, our business remains well positioned in growth markets.  In Civil Aerospace, the market will strengthen, driven by increasing demand for travel in the emerging economies, and the need to replace older aircraft with new fuel efficient models.” 

and also:

 “The medium term prospects for our Land & Sea division (previously called Marine & Industrial Power Systems or MIPS) remain attractive and are supported by the investment that will be required in power, transport and infrastructure to support population growth and increasing affluence. … We are confident in the future growth of revenue and profit in this division but the timing, given its shorter cycle, is difficult to predict.”

The company’s Trent engines — which includes the Trent XWB, the world’s most efficient large aero engine, and the newest Trent 7000 — dominate the civil large engine market and there is no obvious reason why that won’t continue in the medium to long term.

And Rolls-Royce also has its money-spinning TotalCare service, which covers key aspects of engine management and maintenance, and can also be tailored to a customer’s specific needs.  More than 90% of orders for Trent series engines include a contract for TotalCare and the high level of demand has lead to Rolls-Royce opening dedicated service centres, including a £50m facility at Heathrow that’s larger than the football pitch at Wembley.

Rolls-Royce’s share price may stay grounded for a while yet, until the cyclical headwinds of the civil aerospace market die down, but it could take off nicely in the medium to long term, making it something of a bargain at its currently beleaguered level.

Of course, no matter what other people were doing last week, only you can decide if Rolls-Royce really is a “buy” now.

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Jon Wallis has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

* based on aggregate data from The Motley Fool ShareDealing Service.