Rolls-Royce shares: why management is investing more in power systems

first_img Jay Yao | Monday, 21st December, 2020 | More on: RR I’m sure you’ll agree that’s quite the statement from Motley Fool Co-Founder Tom Gardner.But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.What’s more, we firmly believe there’s still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.And right now, we’re giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool. Although Rolls-Royce (LSE:RR) has bled a lot of money this year due to the pandemic, the company has shored up its balance sheet lately. In October, RR raised £5bn in extra liquidity through a rights issue and bond issuances. Analysts expect air travel to increase over the next few years with the distribution of Covid-19 vaccines. As a result, things could return closer to normal for the company by 2022. Indeed, management expects to target free cash flow of a minimum of £750m free cash flow in 2022, which is actually higher than the company’s core free cash flow in 2018. 5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…And if you click here we’ll show you something that could be key to unlocking 5G’s full potential…As a result of the anticipated normalisation, the company is going on the offensive and planning to expand. In terms of where the company plans to focus, Rolls-Royce CEO Warren East recently said that he plans to invest more in the company’s power systems going forward.Power systems divisionRR’s power systems division is a big business. It’s a leading provider of medium speed and high speed reciprocating engines. It also provides power generation and complete propulsion systems. According to the 2019 annual report, power systems is second-largest division after civil aerospace. It accounted for 22% of underlying revenue last year. The division is also profitable and growing before the pandemic. According to the report, it generated £357m in underlying operating profit in 2019, up from an adjusted £315m in 2018.  It’s also pretty resilient. Despite the pandemic, the division reported an adjusted underlying profit of £22m for the first half of this year. One reason for that resilience is that RR realizes relatively stable demand from servicing its existing installed base of engines. With its resilience, profitability, and the future impact of new technologies, management is looking to invest more in the division. Given the tough aerospace outlook in the next few years, management has said they will likely focus R&D more on the power systems business than aerospace. Lately, management has expanded digital solutions in its power systems division, offering customers more utility. Digital solutions can often generate more useful data and potential insights. In the future, management has committed to becoming more green. According to the company’s 2019 annual report, the company has increased “spend on hybrid, gas, and hydrogen technology development“.Rolls-Royce shares: is the stock a buy?Although Rolls-Royce operates in the industrials sector, I think RR is also a technology company. Given the complexity of making jet engines that are safe, fuel efficient, and long-lasting, I would argue the jet engine business is about as high tech as any nearly any business out there. With its world-class R&D workforce, I reckon the company has a shot at succeeding in creating new power systems products that could be in high demand. If RR’s R&D initiative pays off and management executes well, I think Rolls-Royce shares could certainly go higher in the long run. I like Rolls-Royce, but given the current valuation, I’m adding the share to my watch list. I’ll buy if the price dips lower. Jay Yao has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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. Image source: BAE Systems Our 6 ‘Best Buys Now’ Shares Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge! Rolls-Royce shares: why management is investing more in power systemscenter_img Enter Your Email Address Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. 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