To The Moon

Rolls-Royce shares soar 23% after annual results beat expectations. Once the headline came out, people who can afford or cannot afford Rolls-Royce were shocked. In fact, Rolls-Royce's main business is aero-engines, now Rolls-Royce's car trademark already belongs to $Bayerische Motoren Werke AG(BMWYY)$. 

The jewel in the crown of the industry: the engine that saved Britain

In 1906, two engineers set up a company in Manchester, England, with the aim of building automobiles.

Later, in response to national demand, the company became involved in the aero-engine business, producing the Eagle engine that was used extensively in World War I Allied aircraft.

By the end of the 1920s, aero engines had become the company's main business, and Hurricane and Spitfire fighter planes equipped with the company's Falcon engine (also known as the Merlin engine) made a splash in World War II, and the engine was called the hero of guardian Britain - "the engine that saved Britain ".

Annual results beat expectations by recovering demand for international travel

Rolls-Royce sharply beat expectations with a 57% year-on-year increase in underlying profit, driven by its civil aerospace and power systems.

The company recorded £652 million ($786 million) of underlying profit last year, £238 million higher than in 2021 — exceeding analyst forecasts near £478 million. Rolls-Royce’s free cash flow from continuing operations added £2 billion on the year to £505 million in 2022.

The company attributed the results to recovering demand for international travel, noting a 35% year-on-year hike in large engine flying hours for civil aerospace. The aviation sector is recovering from the severe pressure suffered during the Covid-19 pandemic.

Not only own civil aerospace business but also focus on defense

Rolls-Royce operates its business in three key segments. Civil aviation accounts for more than 45% of its total revenue. In this segment, the company manufactures aircraft engines, primarily for wide-body aircraft like Airbus A350 and Airbus A330neo.

The company is starting 2023 with the outlook of the aviation industry looking good with China's reopening. Many airlines, including Air India, $United Continental(UAL)$, $Delta Air Lines(DAL)$ and $Southwest Airlines(LUV)$ have placed orders of hundreds of planes. While most of those planes are narrow body, the increased orders mean that the outlook for civil aviation is strong. This could benefit Rolls-Royce in the near term.

Rolls-Royce is also a major player in the defense industry, where it manufactures products used by militaries in Europe, the United States, Saudi Arabia, and other allied countries. Its products are engines that power aircraft and submarines. The defense business is significantly stable since military spending is usually pegged to economic growth.

Another tailwind is the ongoing conflict in Ukraine. Many governments have committed to boosting their defense orders. Rolls-Royce could benefit substantially since it is one of the leading players in the sector. In 2021, the company won an order valued at $2.8 billion for B-52 bombers by the American government.

The third segment for the business is power systems, which generate about 3.3 billion pounds. Strong new order wins in Civil Aerospace and Defence and a record order book in Power Systems.

Market share is not large, but highly monopolistic

The major players in the aero-engine market are $General Electric Co(GE)$, Pratt & Whitney and Rolls Royce, which are highly monopolized.

In the global commercial aircraft engine market in 2021, the top-ranked CFM International occupies 39% of the market share, CFM International is a joint venture between GE and France's Safran group, and the commercial flight C919 uses CFM's LEAP engine.

Pratt & Whitney, a subsidiary of $Raytheon Technologies Corporation(RTX)$, has a 35% market share.

General Electric has a 14% market share.

Rolls-Royce has a 12% market share.

Overall, Rolls-Royce has seen a major boon after being hit hard during the pandemic.

As travel demand recovered after, the upstream engine manufacturer, which is an airline, received more orders.

The geopolitical impact of the Russia-Ukraine conflict increased revenue from the defense segment.

In terms of earnings figures, profit after tax has improved significantly, cash flow has turned positive, and new debt is decreasing.

Finally, the same idea here, can not afford to buy Rolls-Royce but can afford to buy Rolls-Royce stock hahaha~

$ROLLS-ROYCE HOLDINGS PLC(RR..UK)$ $Rolls Royce Holdings plc(RYCEY)$