Rolls-Royce is a sound investment for both bears and bulls
Published 21/01/2010 | 05:00
WE hear a lot on this side of the Irish Sea about exporters' problems caused by the British government's effective devaluation of sterling but Sharescope readers should be looking at ways to exploit that devaluation.
One way to do so is by buying into manufacturers that export from the sterling area and they don't come much more blue chip than engineering legend Rolls-Royce.
No longer involved in making the rather vulgar cars that bear the same name, Rolls has performed well during the recession and looks set to do better when demand for planes picks up anytime soon.
Boeing's 787 Dreamliner, which flew for the first time in December, is powered by Rolls's Trent 1000 engine and a slew of other airlines from China to Ethiopia have ordered its engines recently because they perform particularly well in hot climates.
While aircraft sales will boost profits and the share price, Rolls has repositioned itself in recent years by building up a convincing aftersales servicing and parts business, while allows the company to make money if airlines decide to stick with older planes during the recession.
This is a hedge against a continuing slump, which makes the stock a comfortable bet for bears as well as bulls.
Just last week, Rolls announced that it had signed a service agreement with Britain's Ministry of Defence worth £865m (€1bn) to support the RAF's fleet of Eurofighter Typhoon aircraft.
While demand for civil-aviation engines and other Rolls strengths, such as military engines, looks set to continue, the Bristol-based company also offers strong evidence of being well run, with more than £1bn in net cash on its books and savings of around £170m around the corner, after the workforce was trimmed back to 40,000.
One uncertainty for long-term investors, however, is the race to produce a new generation of jet engines, which pits Rolls-Royce against a joint design between Airbus SAS and Boeing.
The two designs, which won't go into production for years, differ radically and only one is likely to win out.
Fans of Rolls include the 'Investors Chronicle' magazine, which tipped the share as one of the eight British shares to buy in 2010, and the 12 brokerages on Bloomberg, ranging from Cantor Fitzgerald and Citi to ICAP, which all rate the stock 'buy' or higher.
Rolls-Royce's interests in defence and nuclear power may make some Sharescope readers queasy but for those who like a well-financed company with a reliable dividend and a hedge against a strong euro, it looks like a good bet.