Despite its reputation for excellence, the financial performance of Rolls-Royce (LSE: RR) over the past few years has been far from excellent. But I continue to hold Rolls-Royce shares – here are five reasons I like them.
1. Long-term civil aviation demand
It has been a challenging time for civil aviation, with passenger numbers plummeting in 2020 and only a patchy recovery since then. Slow rebuilding of demand in some markets remains a risk to profits for Rolls-Royce.
But over the long term, I expect more and more people in a growing global population to want to fly. Demand has been increasing for decades, with occasional interruptions every few years. I expect that trend to continue, which should lead to resilient demand for the manufacture and servicing of aircraft engines.
2. Defence spending
Rolls-Royce has more than one string to its bow, however. As well as civil aviation, the company has a sizeable defence business with a well-established customer base.
The security situation in Europe has worsened significantly in 2022. Governments are therefore revisiting their defence plans and spending, which I expect to translate to substantially more money being spent on kit from suppliers such as Rolls-Royce.
3. Limited competition
One of the things I like about the business model at Rolls-Royce (and other engine makers) is the economics of the marketplace. The barriers to entry in this industry are high as it takes expertise and lots of investment to build engines commercially. That means only a few companies operate in the space globally.
On its own, that could help keep profit margins attractive. On top of that, engines are expensive and can easily run into many millions of pounds. Operating in a big ticket industry with limited competition is attractive in my view.
That does bring a risk, though, which is that in some markets there may occasionally be regulatory investigations into competitiveness. That could add costs for companies like Rolls-Royce.
4. Future ready
It has been a tough few years for the Rolls-Royce workforce, with the company slimming down substantially. I see that as bringing some risks and rewards. One risk is that the company may lose some technical expertise, which is important for its product quality and development.
But the benefit is that the company is now leaner than it was before, which could help profit margins. It is also actively looking at how to develop engines running on non-fossil fuels like hydrogen. I think the company’s future focus should mean it can continue to do well in coming years.
5. Rolls-Royce shares sell for pennies
Despite what I see as the attractive long-term economic characteristics of its business, Rolls-Royce shares trade for less than a pound.
I think they may continue to struggle for a while, in the absence of specific news to boost them. But I am a long-term investor and find the investment case appealing.
