Tailwinds

Rolls-Royce has plenty going on for me to get excited. Guidance for FY22 is upbeat as it expects to generate positive free cash flow for the year. This is an encouraging sign considering that it will be three years since the firm achieved such a feat.

The return of air travel from a booming tourism industry and the current geopolitical climate could bring in more revenue. As a result, aircraft engines and maintenance will see more demand. The move of many governments’ budgets towards a bigger focus on defence also provides tailwinds for Rolls-Royce’s defence segment. Furthermore, the introduction of the Airbus A350 freighter serves as a great opportunity for its Trent XWB engines, with 58 additional engine orders since its launch.

Powerhouse

Rolls-Royce is also expecting to see its power systems segment gain more revenue. This comes along with the wider move towards independent energy sources. There are plenty of exciting projects I think Rolls-Royce could benefit from. For one, its incentive to create more sustainable energy and fuel alternatives. Synthetic fuels, hydrogen, and nuclear take advantage of industry tailwinds towards green energy. Additionally, its partnership with Tecnam and Widerøe to develop a zero-emissions ‘P-Volt’ commuter aircraft will be a game-changer if successful. Overall, these moves should do Rolls-Royce shares wonders in the long term.

Take-off aborted

With an exciting future, there are also several risks worth noting. Given that the majority of revenue for Rolls-Royce stems from its civil aerospace segment, it’s worth dissecting it. With most engines on order being the Trent XWB for the Airbus A350, this could potentially present a downside risk. As an increasing number of airlines complain about surface degradation issues on the A350, they may be tempted to follow in the footsteps of Qatar Airways to stop deliveries of the aircraft type. This would have an adverse impact on the main stream of revenue, as the Airbus A330neo and Boeing 787 bring in significantly less cash.

Stalling financials

Overall, I think Rolls-Royce’s financials aren’t in a good position. While its short-term liquidity is fine, with no maturities before 2024, the long-term outlook doesn’t bode well in a high-interest-rate environment. Soaring debt, negative shareholder equity, and negative free cash flow, raise too many red flags for me.

I could argue that Rolls-Royce is too big to collapse. The duopoly of Airbus and Boeing, as well as NATO governments, are too reliant on the firm for it go under. So poor financials could be discounted as institutions and governments could bail it out in the worst-case scenario. Although it had deals of £50.6bn signed as of Q4 2021, guaranteeing revenue for the future, I still don’t think the shares are worth the financial risk. For that reason, I won’t be buying. Instead, I will be be placing Rolls-Royce on my watchlist until its financial situation improves.

The post Are Rolls-Royce shares a buy? 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.

Top telecoms?

TalkTalk Telecom Group (LSE: TALK) shares have had a tough 12 months, suffering a 43% fall to 221p. But that could well be overdone, with the shares now on a predicted P/E for the year to March 2017 of 15.6, dropping to 12.7 a year later. But what does today’s first-quarter update reveal?

Despite a lower customer base, overall revenue has been flat, with corporate revenue up 7.5% and data revenue up 38.5%. The company expects full-year revenue to “grow modestly“, and has reiterated its guidance of headline EBITDA of £320m-£360m. Debt is expected to keep falling, and the firm says its 2017 dividend should be at least in line with 2016’s and covered by cash flow.

The dividend, forecast to yield 7%, does concern me as it wouldn’t be covered by currently-forecast earnings per share, while net debt stood at £679m at year-end — and I don’t see that as optimum use of cash. But, with that low P/E valuation and EPS growth forecasts giving TalkTalk attractively low PEG valuations for this year and next, I think I do see a bargain here — and very possibly a takeover target.

Electronics winner

Shares in Electrocomponents (LSE: ECM) climbed by more than 9% to 282p by midday, after the electronics and engineering distributor released an impressive first-quarter update. Although overall sales only grew by 1%, that did build on a stronger fourth quarter, and showed sales growth slanted towards Europe — though Asian and North American sales are falling.

But is the firm’s focus on Europe a risk in the post-Brexit world? All chief executive Lindsley Ruth had to say was that it’s too early to tell, but the fall in the value of the pound should make the firm’s exports more attractive and should provide a benefit to profits stated in Sterling. One to buy? There’s some uncertainty here, but with the firm’s undemanding P/E of 17.5 this year, dropping to 15.5 next, coupled with expected dividend yields of 4.5% and with EPS growth forecasts, it looks relatively safe for a growth stock.

Silicon success

Shares in IQE (LSE: IQE) have had a rocky ride, losing 44% over the past five years. But a trading statement from the silicon wafer supplier this morning provided a 15% boost, taking the shares to 20.4p. Sales in the first half of the year are expected to be at least 15% higher than in the same half of 2015, with revenues coming from an increasingly diversified range of products and services.

Net debt is reducing thanks to strong cash generation, with £3.5m in license income from joint ventures expected to add to the pot in the half. Chief executive Dr Drew Nelson could barely have sounded more upbeat, telling us that “with the progress being made on new product qualifications, further product developments and with increasing revenue diversity, we remain on track to achieve full year expectations”.

With the shares valued at a mere six times forecast earnings, and two years of EPS growth forecast to follow on from the previous three, IQE is my pick of the bunch here.

The post Three shares to buy after today’s updates? appeared first on The Twelfth Magpie.

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