Rolls Royce shares hum with delight, but I think they can rise a lot higher

Rolls Royce shares have gone against the grain, surging while most stocks were falling sharply. Its latest results, covering 2019, delighted the markets, but I think things can get even better.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The last few years have not been a good period for Rolls Royce Group (LSE:RR). Shares have fallen by a third over the last five years and have lost around 7% this year. All the more ironic then, that they should rise while the broader stock market tumbles after having enjoyed such a good few years.

The company has released its latest results, and the markets were pleased with what they revealed and shares surged. Like most companies at the moment, the company acknowledged a likely negative impact on sales this year from the coronavirus, but said that “long-term growth trends remain intact.”

Rolls Royce manufacturers aero engines for large commercial aircraft and military use. It also produces power systems and a range of other aero-engine products and services and maritime systems in the naval sector.

Its performance in recent years was hit hard with issues concerning its Trent 1000 engine, but the company expects costs related to this to fall sharply this year.

What I like

The latest results revealed a lot to be positive about.

For one thing, its relatively new CEO, Warren East, seems to have re-galvanised the company, reducing costs, while successfully developing new innovative products. East said that there has already been a “sustainable cultural and performance shift.” He also talked about the company “innovating to become a disruptor in new areas.” I like the sound of that, and believe it’s the right strategy at a time when technology is changing fast.

The latest results revealed a £521m improvement in net cash — that works out at around 62% up on last year. Sure the company made an operating loss — but this was expected, and entirely explained by an exceptional programme charge related to the Trent 1000 issues. Underlying operating profit stood at £808m, 25% up on last year.

The company is also targeting free cash flow of £1 a share in the midterm. This augurs well for future dividends.

That’s not what drew my attention, however.

The company claims that its Trent XWB is the most efficient civil large engine in service today. The company is following this up with its next generation product called UltraFan. With the pressures of climate change forcing the aerospace industry to focus on ways to limit use of fossil fuels, this product is enormously important.

East also talked about the company’s drive for alternative sustainable fuels and its commitment to develop new low emission technologies.

The company’s expertise is outstanding. This means that Rolls Royce can excel as it focuses on efficient use of fuels and sustainable energy.

East said that the company is “well placed to realise our long-term aspiration to be the world’s leading industrial technology company.” That’s a bold ambition. If it can be realised, profits and shares should rise significantly.

I think that Rolls Royce is well placed to benefit from the significant changes afoot.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Michael Baxter has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Up 95%, is this FTSE winner the best high-yield star for me to buy now?

Do we have to choose between share price growth and high-yield dividends? In this case, over the past year, it…

Read more »

Investing Articles

Up 140% and rocketing out of the FTSE 250! Is it too late for me to buy this red-hot stock?

Miniature war games hero Games Workshop has outgrown the FTSE 250 and is hammering at the door of the UK's…

Read more »

Investing Articles

If I invest £10,000 in Taylor Wimpey shares, how much passive income will I receive?

Taylor Wimpey shares have fallen and are now paying a huge dividend. How much might I receive by investing a…

Read more »

Index Funds text carved in stone background
Investing Articles

Why I choose to invest in individual stocks rather than an index fund

Our writer examines the differences between stock picking and investing in index funds and why he feels there’s more to…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

Here’s the dividend forecast for Sage Group shares through to 2026!

The dividend on Sage shares has risen for 12 straight years. Can the FTSE 100 company keep its proud record…

Read more »

Happy African American Man Hugging New Car In Auto Dealership
Investing Articles

Will 2025 be make or break for this FTSE 250 stock hitting the headlines?

One of the FTSE 250's worst performers in 2024 has just issued another profit warning, but could 2025 mark the…

Read more »

Investing Articles

£3,000 invested in Greggs shares three months ago is worth this much now

Harvey Jones was on the verge of buying Greggs shares in August but decided they looked a little pricey. So…

Read more »

Investing Articles

After rising a stunning 97% is this FTSE star still my best share to buy today?

This time last year Harvey Jones declared FTSE 100 data analytics firm RELX to be the best share to buy.…

Read more »