Company in the news: Rolls-Royce

Rolls-Royce (LSE: RR) fell foul of the City expectations machine last week because, despite posting very good financial results for 2013 with profits growth of 23%, it has said that profits won’t grow at all in 2014. The share price has been hammered.

We tipped Rolls-Royce as a long-term buy in MoneyWeek a few weeks ago. While the timing of this tip now looks unfortunate, we still believe that the long-term prospects for its shares remain good.

Profits will be held back in 2014 due to governments cutting back on defence spending. Consequently, Rolls-Royce expects its defence profits to be down by 20%. That’s disappointing, but the investment case for the shares has always been primarily about the the prospects for the company’s civil aerospace business, as customers such as Boeing and Airbus ramp up production.

In 2014, profits in this section are expected to grow strongly. Total company profits are expected to start growing again in 2015. Taking a step back from the short-term outlook, Rolls-Royce looks to be in rude health.

Its order book of £71bn is nearly five times current sales and will help deliver long-term profit growth. It can still cut costs and boost cash flow if need be. The company also has £1.9bn of net cash in the bank.

Verdict: buy

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