Should You Buy Rolls-Royce?


LONDON -- I believe engineering giant Rolls-Royce is a dependable pick for investors seeking copper-bottomed earnings growth. In particular, its role as a major player in the aerospace business should underpin long-term strength.

Growth story keeps rolling on
Rolls-Royce's 2012 results released earlier this month showed underlying revenue punch 8% higher to £12.2 billion, which pushed underlying pre-tax profit 24% higher to £1.4 billion.

This was the tenth successive year of profit growth, and a chunky group order book of £60.1 billion -- up 4% from 2011 -- provides reassurance of future top-line growth.

This FTSE 100 member has its fingers in many pies, and invests colossal sums in R&D across the group to cement its role as a technological behemoth. As well as an enviable reputation in airplane engine manufacturing, the firm is also a major player in the energy and marine sectors, and power system deliveries hit record levels last year.

Primed to soar higher
Rolls-Royce is in pole position to surge higher owing to its expertise in the civil aerospace market. This area accounted for 53% of underlying revenue in 2012.

The company reported that sales of Trent and other engines leapt 23% during the second half versus the first, while the firm's civil aerospace order book rose 5% in 2012 to £49.6 billion. New orders of some £10.6 billion underscore the steady momentum in this business.

Rolls-Royce has invested heavily to underpin future growth, and last year opened a brand new facility in Singapore -- its largest manufacturing base in the lucrative region of Asia -- to boost production capacity for its Trent engines.

Similar to other areas across the group, Rolls-Royce has an extensive customer base within its airplane "aftermarket" business from which it generates huge turnover. These formidable barriers of entry represent another line of defense for revenue growth.

Flight plan to steady earnings expansion
City brokers expect earnings growth to slow from recent years -- earnings per share advanced 22% to 59 pence last year -- but still provide appetizing double-digit returns. A 10% compound average increase is penciled in for 2013 and 2014, to 62 pence and 72 pence respectively.

A P/E ratio of 15.8, falling to 14.4, is not the cheapest when compared with a reading of 13.6 across the wider aerospace and defense sector. But the diversity of the group's businesses, the world-class expertise therein, plus the history of profit growth, justifies the premium rating.

Zone in on other sterling stocks
If you already hold shares in Rolls-Royce, and are looking for excellent earnings prospects elsewhere, this special report highlights the possible FTSE winners identified by ace fund manager Neil Woodford.

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