Aviation and defense companies or exchange-traded funds (ETFs) appeal to many buy-and-hold investors. So today we discuss the affiliate jet engine manufacturer Rolls-Royce Holdings (LON 🙂 (OTC :), announced on March 11
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In the past 12 months, the RR share has fallen by more than 40%. However, since the beginning of 2021, the shares have had a significant run-up and have returned more than 10% so far. On March 11, they closed at 113.8 pence ($ 1.53 for US-resident shares).
Weekly chart from Rolls-Royce.
The company's beginnings date back to 1906. Car enthusiasts will recognize the quintessentially British luxury brand. However, fewer people will realize that Rolls-Royce also became a manufacturer of aircraft engines during the First World War. In the 1970s, financial troubles split the company into two separate entities, namely automobiles and aircraft engines.
In 1998, Bayerische Motoren Werke AG (DE 🙂 (OTC :), the Germany-based car manufacturer known as BMW, acquired Rolls-Royce Motors car group. The other entity, Rolls-Royce Holdings PLC, the aircraft engine manufacturer, is the FTSE 100 member we're looking at today.
The Role of Government in A&D
The aerospace segment includes both military and commercial aircraft. COVID-19 was a major blow to the civil segment of the aerospace companies. Statistics from the International Civil Aviation Organization (ICAO) show, "as capacity fell by about 50 percent last year, allowing only 1.8 billion passengers to fly through 2020, compared to about 4.5 billion in 2019."
Airlines and companies such as Boeing (NYSE 🙂 and Rolls-Royce have been affected. Their earnings and earnings were mixed at best. However, despite its woes, BA's stock is up about 35% in the past 12 months, hitting a new 52-week high on March 11.
Likewise, the index has also risen by about 28% over the past year. Also, the index has returned more than 32% in the same period. In other words, RR shares have not fully participated in the profits of peers in the past year.
On the other hand, most countries are usually not short of defense budgets, which has a lot of A&D companies in the back. Right now, the US has the largest military budget, followed by China, India, Germany and the UK.
Rolls-Royce Recent Earnings
Aero engines manufactured by Rolls-Royce are found not only in military and civil aircraft but also in other industries. For example, its subsidiary in Bergen, Norway, supplies medium speed engines for power generation applications for the oil, gas and marine industries.
The company also offers specialty products, technical services and safety critical systems for nuclear power plants. In fact, most of the revenue comes from engine maintenance contracts that last for years after the sale of an engine. In pre-pandemic times, investors appreciated the steady flow of cash flow generated by such lucrative contracts. But when the engines stopped working, so did the income.
The figures for the full year 2020 showed the negative impact of the pandemic on operations and statistics, as well as the short-term outlook. Sales were £ 11.76 billion (or $ 16.42 billion), down nearly 23.9% year over year (year over year). The pre-tax loss was £ 4 billion (or $ 5.6 billion).
In 2020, management's focus was on realizing cost savings, which came in part from significant job cuts. It also raised money from a rights issue. It hopes to make cash flow positive in the second half of 2021.
Bottom Line
Rolls-Royce is a major member of the FTSE 100 index and a globally recognized name in A&D. However, it could take several months for the stocks to reach their pre-pandemic levels.
Given the reality that most commercial flights worldwide are still on hold, Rolls-Royce may not be immune to further turbulence in the air. The company hopes that flight hours will increase in 2021 to approximately 55% of the 2019 level. In 2020 this was 43%.
However, if that projection is incorrect, RR investors could simply decide to take money off the table. We would like to buy RR shares if there is a decline of about 7% from the current level.
Finally, readers looking for investment opportunities in the industry may also want to consider exchange-traded funds (ETFs). They include:
Invesco Aerospace & Defense ETF (NYSE :),
iShares US Aerospace & Defense ETF (NYSE :),
SPDR® S&P Aerospace & Defense ETF (NYSE 🙂
Procure Space ETF (NYSE :).
