Why Rolls-Royce Holding is a FTSE 100 growth stock I’d buy today
The outlook for Rolls-Royce Holding(LSE: RR) may be relatively uncertain at the present time. After all, the aerospace and defence stock has declined by 28% in the last four months. Fears surrounding the world economy in an era where protectionist policies are becoming the norm and interest rates moving higher seem to have caused investors to demand a wider margin of safety.
The company, though, appears to have strong growth prospects. It could therefore be worth buying alongside another FTSE 100 share which released a positive update on Monday in my opinion.
That company is private healthcare provider NMC(LSE: NMC). It released a trading update which reconfirmed its strategy, as well its financial forecasts for the next couple of years. In terms of its strategy, the business is focusing on providing wider coverage, while offering a diverse range of services. It is also seeking to capitalise on new opportunities, with recent contract wins being evidence of this.
Over the course of 2018 and 2019, NMC expects to report revenue growth of between 22% and 24%, while its EBITDA (earnings before interest, tax, depreciation and amortisation) is expected to move 36% higher in 2018 and as much as 20% higher next year. Clearly, such growth is relatively high at the present time, and suggests that the stock could be worthy of a premium valuation.
The company, though, has a price-to-earnings growth (PEG) ratio of just 1 at the present time. This suggests that there may be a margin of safety included in its valuation that creates the opportunity for capital growth over the long run.
Also offering a bright long-term future in my opinion is Rolls-Royce. The company has experienced a troubled past, with its financial progress having been somewhat disappointing. Now, though, it seems to be on a path to improving growth. It’s cutting costs through moves such as headcount reductions, while also seeking to invest heavily in its products over the coming years.
One area where the stock could deliver improving performance is in aerospace, where the number of aircraft across the world is expected to increase significantly over the next few decades. This could boost sales and provide a constant catalyst on its bottom line, with demand for its evolving engines, set to be available on a wider range of aircraft, likely to rise.
In terms of its valuation, Rolls-Royce has a PEG ratio of around 0.3 at the present time. Although the FTSE 100 has fallen in recent months, this still seems to be relatively low when compared to a number of its index peers. As such, and while the stock is undergoing a period of major change which could create a volatile share price, its long-term growth outlook appears to be improving as it refines its business model.
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Peter Stephens owns shares of Rolls-Royce. The Motley Fool UK has recommended NMC Health. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.