Rolls-Royce (LSE:RR., Financial) is our other long-term holding fighting through difficult weather. It has become abundantly clear over the last year that as they developed their latest generation of products, both the airplane manufacturers and their engine suppliers pushed the technological envelope too far. For Rolls, the consequences have involved enormous cost and distraction. We are cautiously optimistic that the company has finally gotten its arms around the particularly acute problems that have plagued the engine it developed for the Boeing 787. Crucially, the Airbus A350 engine that will become the preponderant driver of earnings growth over the next two decades appears to be performing well during its early time “on wing.” If 787-related remediation expenses abate as expected over the next 18-24 months, and if A350 engine performance stays healthy, Rolls should have a very strong period of cash earnings growth ahead of it and today’s stock price should look very attractive in a few years. We are the first to acknowledge, however, that every time the sun has broken through the clouds during our long and frustrating involvement here, new storms have rolled in.
Though well over a decade of painful memories are hard to ignore, we have tried to keep our extensively researched analysis of Rolls fact-based and forward-looking, and an encouraging view from that perspective led us to modestly increase our position during 2019.
From Ruane Cunniff (Trades, Portfolio) & Goldfarb's Sequoia Fund fourth-quarter 2019 letter to shareholders.
