Right now I’m analysing some of the most popular companies in the FTSE 100 to establish if they are attractive long-term buy and forget investments.
Today I’m looking at Rolls-Royce (LSE: RR) (NASDAQOTH: RYCEY.US)
What is the sustainable competitive advantage?
Rolls-Royce is second to none in the world when it comes to the development and production of power systems for the marine, aerospace and energy industries.
Indeed, the firm’s extensive order backlog is testament to the demand for the company’s services. Rolls’ backlog grew 15% during the first half of this year alone and now stands at £69.2 billion, which locks in nearly five years of revenue at current rates.
What’s more, thanks to the company’s industry leading position, Rolls has the power to price its products how it sees fit, maintaining stable and predictable profit margins — a great trait to look for in a buy-and-forget share.
This pricing power, along with managements recent drive to cut costs, has resulted in profits actually rising faster than revenue. For example, during the first half of this year, the company reported a rise in underlying revenue of 27% but a rise in underlying profit before tax of 34%.
Company’s long-term outlook?
According to Boeing, 35,280 new planes will need to be manufactured for the global aviation industry by 2032. This indicates that the demand for Rolls’ goods and services are unlikely to decline over the next two decades.
In addition, the rising demand for energy, especially oil & gas, will ensure that demand will only grow for the company’s products designed for use within the energy industry.
Moreover, the Rolls Royce brand, which is backed up by more than 100 years of history, puts the company at the forefront of the industry. It is unlikely that the company will be dethroned from its market leading position any time soon.
Having said that, Rolls has recently been hit by allegations of malpractice within China and Indonesia exposing the company to risks of litigation and fines.
However, these allegations relate to the company’s marketing practices, not the quality of its equipment, which is what the company is known and respected for. So in my opinion, reputational damage should be limited.
Foolish summary
All in all, Rolls Royce is a world leader in its field and the company’s rapidly growing order backlog stands testament to this. What’s more, taking into account Rolls’ 100 year long history, pricing power and huge number of new planes that the global aviation industry is expected to acquire by 2032, I believe that the company’s future looks relatively stable.
So overall, I rate Rolls Royce as a very good share to buy and forget.
