The engine room

Rolls-Royce’s civil aerospace division is its main revenue driver. The segment generated 41% of revenue in 2021. Of that revenue, 72% is attributed to large engines. It’s also worth noting that while Rolls-Royce generates a huge sum of revenue from engine deliveries, its value proposition comes from the aftermarket. This means it stands to earn more from servicing the engines it delivers. As such, higher flying hours mean more servicing, which results in higher service revenue.

Thankfully for Rolls-Royce, there are plenty of tailwinds as travel demand picks back up. For one, flying hours are forecasted to increase in the medium term. Secondly, freight is anticipated to fly the most hours compared to business aviation and large passenger jets. Therefore, the FTSE 100 firm is expecting more shop visits. Not to forget, the incoming freighter version of the A350, of which Rolls-Royce has a 100% market share, will benefit from this tailwind.

Neo worries

Management didn’t address worries surrounding the cancellation of a chunk of Airbus A330neo orders, but I still remain optimistic. Based on the table below, Rolls-Royce stands to gain a lot more revenue from servicing engines than delivering them.

Management mentioned its goal to service over 7,000 engines by 2030, a 30% uptick from the current number. The Airbus A330’s Trent 700 engine is Rolls-Royce’s most profitable engine. On the conference call, the board mentioned that the Trent 700 still has 40% of its flying hours ahead due to its low average age. With more service extensions and engine demand as well, more service revenue is to be expected in the future.

Things are looking up

It’s no secret that Rolls-Royce’s financials are a nightmare. The British firm has negative shareholders’ equity with staggering amounts of debt. Nonetheless, I have reason to believe that things are looking up. At the investor day presentation, CFO Arvind Balan guided the firm’s civil aerospace division to breakeven this year. This is in line with Rolls-Royce’s wider outlook when it released its Q1 trading update.

Additionally, the London-based firm is seeing higher operating margins. This is down to investments in digitalisation and a leaner production system which includes reuse of parts, as well as a reduction in overheads and R&D costs. Consequently, Rolls-Royce expects free cash flow to comfortably exceed operating profit. From this, I expect the company to be able to start paying off its debt in 2024.

Nevertheless, I am wary of the economic headwinds which could hit flying hours, and as a consequence, Rolls-Royce’s top line. That being said, management reiterated that economic headwinds have been accounted for in their projections. That being the case, I am closely watching Rolls-Royce, and may potentially buy shares once it’s able to settle its debt.

The post The Rolls-Royce Share price may be set for take-off! appeared first on The Twelfth Magpie.

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John Choong has no position in any of the shares mentioned at the time of writing. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Sales at the company’s Land Systems division have slumped in recent times thanks to difficulties in the agricultural and construction markets. Organic sales fell 8% between January and September, but this isn’t GKN’s only problem, the firm warning last month that “military aerospace programmes and agricultural equipment markets look set to continue their decline.”

Indeed, GKN’s Aerospace arm has also been beset by falling military plane sales as mature defence programmes have expired.

Having said that, I believe that the long-term outlook for its aeroplane division remains extremely rosy as both Airbus and Boeing ramp up aircraft construction. Meanwhile, the acquisition of Fokker in 2015 has significantly bolstered GKN’s position in the electrical wiring and aerostructures sub-segments, providing its sales outlook with an additional shot in the arm.

But this isn’t the engineer’s only hot growth channel — indeed, sales at the firm’s Driveline division continue to outstrip the wider market. And the top line should keep on rising as global car demand heads higher.

Scotiabank advised late last month that global car sales continued to climb in September, a 10% year-on-year rise representing the fastest rate of growth for three years.  The bank also reported that sales in China surged 32% last month as buyers rushed to secure their vehicles before sales tax reductions expired. But this wasn’t the only story — 11 countries reported double-digit rises in September, Scotiabank noted.

Against this backcloth, the City expects earnings at GKN to get back on the front foot from this year, and growth of 2% and 12% is currently predicted for 2016 and 2017 respectively.

And although GKN recently galloped to 16-month tops in October, the firm is still attractively valued in my opinion — P/E ratings of 10.8 times for this year and 9.6 times for 2017 fall well below the FTSE 100 average of 15 times.

Given GKN’s role as a critical parts provider to major aerospace and automotive OEMs, and subsequent potential to generate stunning revenues growth, I reckon GKN is a snip at these prices.

Drugs dynamo

It could be argued that the unpredictable nature of drugs development makes the likes of GlaxoSmithKline (LSE: GSK) a dicier pick for those seeking reliable earnings growth.

However, the Brentford company has a better record than many of its peers when it comes to getting product to market. And the vast sums GlaxoSmithKline has thrown at improving its product pipeline, through both organic investment and M&A activity, is clearly paying off — new product sales clocked in at a staggering £1.21bn during the third quarter.

The number crunchers expect GlaxoSmithKline’s next generation of sales drivers to generate bottom-line expansion of 31% in 2016, putting to bed four successive years of declines. And an additional 9% advance is anticipated for next year.

These figures create P/E ratios of just 15.9 times and 14.4 times, stellar value in my opinion given GlaxoSmithKline’s enormous global wingspan and broad suite of market-leading drugs. I believe that, like GKN, the pharma star is phenomenal value at current levels.

The post These stocks are the FTSE’s true growth greats appeared first on The Twelfth Magpie.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK owns shares of GKN. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.