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 shareshas always been primarily about the the prospects for the company's civil aerospace business, as customers such asBoeing and Airbus ramp up production.
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In 2014, profits in thissection are expected to grow strongly. Total company profitsare expected to start growing again in 2015. Taking a step backfrom the short-term outlook, Rolls-Royce looks to be in rudehealth.
Its order book of £71bn is nearly five times current salesand will help deliver long-term profit growth. It can still cutcosts 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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