Over the years, Rolls Royce (LSE: RR) (NASDAQOTH: RYCEY.US) has earned a reputation as a great British manufacturer, but it is far from a simple metal basher. One of the world’s leaders in power generation, the company’s engines and turbines can be found on jumbo jets, jet fighters, helicopters, ocean liners and in power plants. Importantly for investors, its long-lived service contracts on its jet engines and its massive £71.6 billion order book provide long-term visibility which makes the shares a great choice for an ISA.
Ready for takeoff
One of the attractive aspects of Rolls Royce is that it travels in some pretty exclusive circles. It is one member of a three-company oligopoly that supplies the vast majority of engines for civil aircraft — the planes that are connecting the world.
Rolls Royce earns nearly half of its profits from the civil aerospace market, and with an order book worth more than £60 billion — or nine years’ worth of sales and services — we’ve got some assurance that Rolls Royce will continue to be busy for the next few years.
This is just the beginning, however. Boeing estimates that over the next 20 years the airline industry will need over 35,000 new planes to meet demand, mostly from travellers in Asia. This should keep the order book nice and full.
Service makes investors smile
Selling engines is just the first half of the job for Rolls Royce. Keeping those engines up and running is a second, nicely recurring stream of business for the company, which further improves the predictability of future cash flow.
Currently, Rolls Royce has 12,500 engines flying business and holiday travellers to their destinations, all of whom appreciate the fact that Rolls Royce engineers will be keeping those engines running smoothly for the next decade or so even more than shareholder do.
Last year services generated 54% of the civil aerospace division’s revenue. As the number of Rolls Royce engines in operation increases, that number should grow and provide even more stability to the company’s sales and profits.
Buying a ticket
Following the company’s year-end results in which management warned that next year’s earnings will likely be flat as cuts in military spending hit Rolls Royce’s defence division, the shares dropped 20%.
After recovering a bit the shares trade at 15 times next year’s expected earnings. While this still isn’t a screaming bargain, it is the cheapest the shares have been in the past two years. More importantly, it isn’t a crime to pay bit of a premium for a company with the type of visibility that Rolls Royce can boast — high-quality companies rarely go on sale.
Long distance flight
According to S&P Capital IQ, over the past decade, Rolls Royce has provided total returns (that includes dividend income) of almost 483% compared to the 115% total return for the FTSE 100.
While I can’t guarantee the next decade will be just as lucrative, I can say holding shares of Rolls Royce in an ISA can help you capture the most of whatever gains do occur by shielding you from the grasping hands of the taxman.
