Aerospace engineering leader Rolls-Royce Holdings plc (RYCEY) has reported a formidable rebound. The company, headquartered in the United Kingdom, disclosed the first-half underlying operating profit of £673 million ($857.25 million), surpassing last year’s figure by over fivefold. Also, it registered a free cash flow of £356 million ($453.47 million).

According to CEO Tufan Erginbilgic, the surge in profit and cash generation results from greater productivity, efficiency, and improved commercial outcomes. He said, “We have tightly managed our cost base to offset inflationary cost pressures.”

Furthermore, on July 26, the company raised its 2023 projections for underlying operating profit to a range of £1.2 billion ($1.53 billion) to £1.4 billion ($1.78 billion) and free cash flow to £900 million ($1.15 billion) to £1 billion ($1.27 billion). The revision highlights the acceleration of transformation efforts driving enhanced financial performance.

Numerous substantial orders are further augmenting the company’s outlook. For instance, on March 13, RYCEY announced that Rolls-Royce Submarines Ltd, as part of the AUKUS trilateral agreement involving Australia, the United Kingdom, and the United States, would supply reactors for Australia’s nuclear-powered submarines.

This move could solidify RYCEY’s position as a premier power and propulsion solutions provider and also unlock fresh market prospects, fueling revenue growth and bolstering profitability for the company.

Furthermore, on February 14, RYCEY reported receiving a sizable order for 68 Trent XWB-97 engines from Air India, with an additional 20 options. This landmark order, the largest for the exclusive Airbus A350-1000 powerplant, holds immense potential to propel RYCEY’s growth and expansion endeavors to unprecedented heights.

Shares of RYCEY have surged 34.7% over the past month and 142.3% over the past year, closing its last trading session at $2.52.

Here is what could shape RYCEY’s performance in the near term:

Robust Financials

During the fiscal first half that ended June 30, 2023, RYCEY’s underlying revenue increased 30.9% year-over-year to £6.95 billion ($8.85 billion). Its underlying operating profit rose 438.4% from the year-ago value to £673 million ($857.25 million).

Additionally, the company’s underlying profit before taxation and underlying earnings per share came in at £524 million (667.46 million) and £0.05, compared to a loss of £111 million ($141.39 million) and £0.02 in the previous year’s period, respectively.

Positive Analyst Estimates

Analysts expect RYCEY’s revenue to increase 19.7% year-over-year to $18.26 billion for the fiscal year ending December 2023. The company’s EPS for the current year is expected to rise 320.3% year-over-year to $0.10.

Moreover, RYCEY’s revenue and EPS for the next fiscal year (ending December 2024) are expected to grow 6.9% and 21.7% year-over-year to $19.51 billion and $0.12, respectively.

High Profitability

RYCEY’s trailing-12-month net income margin of 9.80% is 58.3% higher than the 6.19% industry average. Its trailing-12-month levered FCF margin of 12.95% is 139.4% higher than the industry average of 5.41%. In addition, the stock’s trailing-12-month cash from operations of $3.03 billion compares to the industry average of $240.26 million.

Discounted Valuation

In terms of forward non-GAAP PEG, RYCEY is trading at 0.42x, 75.9% lower than its industry average of 1.73x. Its forward EV/Sales of 1.40x is 19.7% lower than the 1.74x industry average. Moreover, its forward EV/EBITDA of 9.41x compares to the industry average of 11.17x.

POWR Ratings Show Promise

RYCEY’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. RYCEY has a B grade for Value, in sync with its lower-than-industry valuation. The stock also has a B grade for Quality, consistent with its high profitability.

RYCEY is ranked #5 in the 55-stock Auto & Vehicle Manufacturers industry. Click here to access RYCEY’s Growth, Momentum, Stability, and Sentiment ratings.

Bottom Line

RYCEY has achieved an impressive fivefold increase in its underlying operating profit during the first half of the fiscal year. Concurrently, the company has garnered significant orders, strategically positioning itself for a substantial and prolonged phase of expansion.

Given the company’s robust financial performance, positive analyst outlook, high profitability, and discounted valuation, RYCEY could be an ideal buy this week.

How Does Rolls-Royce Holdings plc (RYCEY) Stack Up Against Its Peers?

While RYCEY has an overall POWR Ratings grade of A, equating to a Strong Buy, one could also check out other stocks within the Auto & Vehicle Manufacturers industry that are overall A (Strong Buy) rated: Stellantis N.V. (STLA), Honda Motor Co., Ltd. (HMC) and Mazda Motor Corporation (MZDAY).

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RYCEY shares were trading at $2.53 per share on Friday afternoon, up $0.01 (+0.40%). Year-to-date, RYCEY has gained 136.45%, versus a 14.79% rise in the benchmark S&P 500 index during the same period.

About the Author: Aanchal Sugandh

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns. More...

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