Today I am looking at Rolls-Royce Holdings’ (LSE: RR) (NASDAQOTH: RYCEY.US) earnings prospects for 2014.
Earnings set to fly higher
In my opinion, engineering leviathan Rolls-Royce is in fantastic shape to enjoy solid earnings growth not just in 2014 but well into the future.
The company’s industry-leading expertise across a multitude of engineering sectors gives it tremendous strength in diversity, and an order book of £69.2bn as of end-July — up 15% from the corresponding point in 2012 — provides fantastic earnings visibility for this year and beyond.
In particular, Rolls-Royce, which generates around 44% of group revenues from its Civil Aerospace division, is poised to enjoy the fruits of surging aircraft build rates well into the next decade. The firm’s Trent engines and TotalCare service and maintenance packages have made it an established favourite with giant planebuilders Boeing and Airbus,and capacity expansion here in recent years should cater for future growth.
On top of this, I expect Rolls-Royce’s Energy division to continue to pull up trees amid rising energy demand across the globe. Meanwhile, the company’s Marine and Defence Aerospace arms should also receive a boost looking ahead as budgetary pressures in the West ease and military upscaling in new geographies ratchets up.
However, news last month that the Serious Fraud Office had launched a formal investigation into allegations of bribery during the 1980s and 1990s has prompted worries over severe financial penalties. The claims first came to light in late 2012, when Rolls-Royce was asked to submit evidence to investigators over corruption and bribery claims related to the sale of its products in overseas markets including China and Indonesia.
Still, Rolls-Royce has instigated sweeping damage-limitation measures since then, having strengthened its compliance procedures in recent years and appointing heavyweight litigation expert Lord Gold to assess its practices. Although the engineer could still face significant fines should improprieties come to light, the case is likely to take many years rather than months to resolve.
Rolls-Royce has printed solid earnings growth in four of the past five years and is expected to print further expansion over the medium term. City analysts anticipate a 12% increase in earnings last year, to 66.4p per share, to advance a further 9% in 2014 to 72.5p.
These projections leave the engineering giant dealing on a P/E rating of 17.5 for this year, above a prospective average of 14.8 for the entire aerospace and defence sector and 17 for the FTSE 100. Still, in my opinion Rolls-Royce’s sterling reputation and solid growth across a multitude of engineering markets — not to mention heavy exposure to the red-hot civilian aircraft segment — justifies this premium.