Today I explaining why I believe shares in engineering giant Rolls-Royce Holdings (LSE: RR) (NASDAQOTH: RYCEY.US) are ready to hit the high road.
Civil aircraft demand to thrust earnings higher
The civil aerospace market is the holy grail for the world’s engineers, as continued growth in air traffic underpins a rosy outlook for new aircraft orders. Indeed, demand for new aircraft is expected to continue surging year-on-year based on current projections, striking a stunning 67,000 within the next two decades. And in my opinion prime parts supplier Rolls-Royce is in great shape to tap into this lucrative trend.
“The global civil aerospace market could see demand for around 27,000 new aircraft & 40,000 new rotorcraft amounting to £2.8 trillion by 2031, with high-growth economies accounting for 45% – 60% of demand for new aircraft,” KPMG notes. And even if UK engineers failed to grow their 17% share in this market, this would still translate to new orders worth some £474bn.
Rolls-Royce is arguably at the forefront of this market, particularly as demand for its Trent engines continues to gallop higher. The company saw the order book at its civilian aerospace division rise 14% during January-June, to £56.7bn, with Trent responsible for more than nine-tenths of the book. And to cater for its rising market share in the engine market, Rolls-Royce opened a state-of-the-art facility in Singapore last year, particularly to latch onto rising demand from emerging Asian markets nearby.
In addition, the engineer also generates oodles of revenues from its TotalCare aftercare business, a bespoke service for the maintenance and management for its civil aircraft engines. Rolls-Royce boasts formidable barriers of entry in this division, and saw underlying revenue from all its services packages rise 3% during January-June, to £1.8bn. And the firm is actively expanding in this area, having opened a new service depot at London Heathrow in the first half of the year.
City analysts expect Rolls-Royce to punch earnings per share growth of 11% in 2013, to 65.9p, before posting an additional 8% gain in the following 12-month period to 71.1p. The company currently changes hands on P/E multiples of 18.4 and 17.1 for this year and next, comfortably exceeding a prospective average of 14.5 for the entire aerospace and defence sector.
Still, in my opinion the firm’s much-heavier exposure to the civil aircraft market, combined with its status as a top-tier supplier to the world’s major aircraft builders and market-leading status across many other engineering markets, justifies this premium rating.