Rolls-Royce(LSE: RR) is a great British brand and the company has gone from strength to strength over the past few decades. However, the recent investigation by the Serious Fraud Office intoallegations of bribery and corruption at Rolls-Royce, has put a black mark next to the companys shares.
Along with allegations, Rolls-Royce is also struggling with the strong pound and falling defence spending around the world. Nevertheless, these weaknesses are mostly short-term, and over the long-term, Rolls-Royce is set to profit as demand for the companys services should only rise.
One of Rolls-Royces most attractive qualities is its long order backlog, which stood at 70.4bn at the end of the first half of the year. To put this into some perspective, Rolls-Royce reported revenues of 15.5bn for full-year 2013, so the companys order backlog locks in four-and-a-half years of revenue.
Unfortunately, the company lostjet engine orders worth 2.6bn, afterEmiratesairline cancelled a planned purchase of 70 A350 aircraft fromAirbusearlier this year. Still, management said thatthe cancellation would only shave 3.5% from its order book, but believes that other airlines would fill the delivery slots. There was a further cancellation relating toSkymark Airlines of Japan, which reduced Rolls-Roycesorder book by 0.5%.
And theres no reason to suggest that Rolls-Roycesorder book wont grow over time., especially for jet engines.
According to aviation industry leaderBoeing,over the next two decades the world will need 35,280 new aircraft, worth a total of over $4trn. Thats a colossal figure and one that should excite Rolls-Roycesinvestors.
Indeed,withsolutions designed to power more than30 types of commercial aircraft, and an existing fleet of almost 13,000 engines in service around the world, Rolls-Royce is well positioned to grab a share of this market.
With a leading position in a market worth more than $4trn over the next 20 years, and an order backlog locking in more than four years worth of revenue, it would understandable if Rolls-Royce traded at a sky-high valuation.
However, considering the above factors and the strength of the Rolls-Royce brand, the company currently looks cheap its shares currently trade at a forward P/E of 15.9, falling to 14.6 for 2015. And the company currently supports a dividend yield of 2.1%, forecast to hit 2.3% next year.
For some, Rolls-Royces valuation may seem expensive, after all, the FTSE 100 only trades at an average P/E of 13.9. Still, in the words of Warren Buffett, its far better to buy a wonderful company at a fair price than a fair company at a wonderful price and Rolls-Royce is a wonderful company trading at a fair price.
Not just Rolls
Rolls position within the worlds aviation market makes it a solid long-term investment. However, finding companies with similar defensive qualities to those of Rolls-Royce can be tough.
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Rupert Hargreaves 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.