James Moore: Keep faith with Rolls-Royce – it's one of the best of British
Investment View: Rolls-Royce. Our view: keep buying. Share price: 842.5P (+30.5P)
There's at least one blue-chip British company that makes things, bashes metal about and generally provides a positive return for investors: Rolls-Royce. Although there is some queasiness about its defence operations, many still see Rolls as an example of what Britain should be doing more of as it attempts to diversify away from the fickle, risky and bonus-driven environs of financial services.
The investment case is very solid, as we highlighted when making the company one of our 10 to follow in 2012, when its price stood at 746.5p.
An update on the performance of the 10 against the market will be published over Easter.
However, having started to drift down after touching a five-year high of 842.5p in March, a reasonable enough question for investors to ask now is whether they should join those who have chosen to take the profits they have made on Rolls.
That would be short-sighted.
For a start, airlines are continuing to buy new planes, and those planes require engines.
There was a wobble back in 2010 when a problem with a Rolls-Royce Trent 900 engine forced a Qantas Airbus jet into an emergency landing. Mercifully, tragedy was averted and the wobble proved to be just that. The company rapidly bounced back and its engines remain in high demand.
But Rolls also has other strings to its bow. One analyst recently noted the company's favourable exposure to the oil and gas industry's capital expenditure cycle. Spending is cranking up and energy people expect the next three to five years to see the highest amount of new field development since the 1970s.
Meanwhile, there are high hopes that the German engine maker Tognum, bought by Rolls-Royce and the German carmaker Daimler, will outperform. Rolls is a company that tends to meet and sometimes beat the City's profit forecasts: there are good reasons for hoping its newest joint venture will too.
As a group, Rolls-Royce's 2011 results, unveiled in February, came in a little way ahead of the consensus forecasts. As far as this year is concerned, there will be ups and downs, as ever, but while the final numbers face headwinds from higher research and development expenditure (only in the City, where they obsess about the short term, is that considered a bad thing) there should still be good earnings growth.
The company's order book, for example, ended the year at a record £62.2bn, 5 per cent ahead of 2010, despite economic uncertainties.
Meanwhile, the balance sheet continues to be sensibly run. Debt maturities are well spread out to 2019 and there is elbow room with liquidity of £2.5bn.
In addition to the Tognum deal – which should create opportunities in the marine and energy sectors – two other actions to maintain growth over the longer term are worthy of note. They are an exclusive deal to develop enhanced Trent XWB engines to power Airbus A350-1000 aircraft and the agreed sale of Rolls' stake in International Aero Engines to Pratt & Whitney, while at the same time announcing an intention to form a new joint venture with the latter to develop engines for the next generation of mid-sized aircraft. In other words, the portfolio is being reshaped for what the company considers to be the best effect.
Last year's retirement of the sainted Sir John Rose and the transition to new chief executive John Rishton, who had been running Dutch retailer Ahold (he has, though, sat on Rolls' board since 2007), appears to have been a smooth one.
It is true that the shares are no longer cheap, but the price hasn't sailed off into the stratosphere.
There are grounds for thinking Rolls-Royce can justify its rating of about 14.5 times this year's forcecast earnings, with a prospective yield of 2.4 per cent.
I'd be inclined to look at the recent profit taking as a buying opportunity.
While, at their current levels, Rolls shares aren't going to fly as high as some of its engines, they should still purr along.
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