Rolls-Royce Delivers Strong 2012 Earnings as Civil Aerospace Boosts Profitability


Rolls-Royce finished 2012 on a strong note with revenue and operating margins higher analysts anticipated. The strength of the quarter was largely driven by 15.5% revenue growth versus 2011 within the civil aerospace segment as aircraft deliveries continue to pick up. Coinciding with the revenue growth, operating margins grew to 11.3% versus 2013. The company continues to experience weakness in the energy business as demand for new power generation capacity has waned in favor of transmission and distribution repairs. Defense aerospace margins held relatively stable during 2012 in spite of customer budget pressures.

While some investors are impressed by the company’s durability in 2012, others are hesitant to project 2012’s success into 2013 given the consolidation among Rolls-Royce’s customer base in civil aerospace, defense budget pressures in Europe and the United States. Offsetting that is the potential for renewed demand for gas turbines, particularly in the United States.

While General Electric and Siemens have established meaningful manufacturing footprints in the region, there may still be an opportunity for Rolls to benefit from the shift towards distributed power versus base load power generation.

Rolls-Royce’s narrow moat rests on the ability of the company to integrate key turbine technologies across industry verticals and lock customers into long-term highmargin service contracts, allowing the company to grow profitability without materially increasing invested capital.


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