Rolls Royce better value for traders

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KS to a combination of superior design, pilot skill and more than a pinch of good luck that engine fragments did not hit more crucial parts of the jumbo jet, Qantas flight QF32 touched down safely a little more than a fortnight ago, leaving its passengers shaken but fundamentally unscathed.

Much the same can be said of the engine’s manufacturer Rolls Royce. On 4 November, the day the Trent 900 engine failed, the London-listed firm’s share price plummeted more than 60 points, a level from which it has so far failed to stage a sustained recovery.

The incident rattled investors but Rolls Royce has remained fundamentally strong. Last Friday Goldman Sachs reiterated its conviction buy rating and its price target of 810p – an upside of 37 per cent. They pointed to the prospect of strong sales growth, the potential for margin expansion and its capacity to generate cash.

For a start, the group’s management have been able to contain the crisis quickly and reassure analysts, easing concerns about long-term reputational damage.

Secondly, Rolls Royce have continued to win contracts despite the Trent 900 failure, such as a $1.2bn order from China Eastern Airlines for Trent 700 engines.

Finally, the marine division is becoming an increasingly important part of the group and now accounts for around 25 per cent of total revenues and 30 per cent of earnings before interest and tax (Ebit).

Yet in the near-term, spread betters should make the most of the likely turbulence in Rolls Royce’s stock. Not only is the investigation and remedial work still ongoing, warns Charles Stanley’s aerospace and defence analyst Tina Cook, but the 2010 impact will be around £50m according to the company itself. There are also concerns among some analysts that the financial impact could continue into 2011 and beyond.

For those looking slightly more long-term, they should remember that prior to this incident “Rolls Royce was priced almost to perfection and trading at a premium,” says Cook. Today’s lower share price provides an excellent opportunity to buy into a top quality company.